Friday, July 1, 2022

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The stupidity of defaulting on $78 Million

Defaulting on a sovereign debt has very serious ramifications to a country’s future stability. So when the Central Bank decided to default on a paltry $78 million USD purely to satisfy an argument that we need the money to import oil and food. The shortsighted decision has caused mayhem in international markets for Sri Lanka. Even companies with strong balance sheets are struggling to raise capital even with premiums. The current Governor is technocrat who has no exposure to markets on banking. Perhaps the reason for taking such a short sighted decision. The Governor must not be influenced by opposition parliamentarians or government parliamentarians. Or go with the flow. The institution must take informed and professional decisions.

Today the credibility of the country is lost for a very long time , and “A” and “B” rated investors will stay from Sri Lanka . The banking system which is struggling will come under severe pressure and will face several challenges when opening letters of credit and doing forex transactions. Forex loans and investments that were previously in the pipeline for local banks would be stopped or postponed. International Banks will recall their credit lines.

Most forex-funded infrastructure projects will stop. Attracting Foreign Direct Investment will be a humongous challenge . Small and medium sized import businesses will be badly affected. Srilanka needs to put together a high level strategy to deal with these challenges when external debt is defaulted. Failure to do so may lead to a serious economic crisis . Those who advised the government to default, must now work on the exit strategy to regain our international credibility .

They must take responsibility for this economic mayhem. The sovereign default is having serious repercussions, it will be the people that will have to face the economic consequences. A default is a serious matter that should have received the formal approval of the Cabinet of Ministers with the advice of the Attorney General as well. Parliament is the approving authority and the final responsibility for finances, did they give the authority to default? The new CBSL Governor must stop giving ultimatums to the government and focus on undoing the crisis they created with the default. He should stop making a circus of the Central Bank .


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