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In the News

Are hedge funds holding up vital debt relief for Sri Lanka

Graham Watson

10th January 2023

As Sri Lanka tries to recover from its debt crisis, it seems that the prospect of recovery will depend upon the extent to which it is able to cancel its existing debts.

However, private creditors own 40% of Sri Lankan debt, but such are the interest rates on this debt that the receive more than 50% of all debt interest payments.

This is because as the original crisis deepened, they were the only group willing to lend to the beleaguered government and made sizeable profits as a result of this risk premium.

Read this Guardian article

But now they are refusing to give this up without a fight, and without their agreement, it seems that debt cancellation will tough to conclude, and a group of 182 'experts' argue that this is the best way of promoting recovery on the island.

Some of the world’s most powerful hedge funds and other investors are holding up vital help for Sri Lanka by their hardline stance in debt-relief negotiations. - The Guardian

External Debt Relief - Exam Question Walkthrough I Edexcel A-Level Economics

Background on the Sri Lankan debt crisis

Sri Lanka has faced a debt crisis in recent years due to a combination of factors, including high levels of government borrowing, a balance of payments deficit, and a depreciation of the Sri Lankan rupee. As of 2021, the country's public debt was around 80% of its GDP, and it has struggled to make payments on its debts.

One of the main drivers of Sri Lanka's debt crisis has been its large government borrowing, which has been fueled by high levels of public spending on infrastructure projects and other initiatives. This has led to a persistent budget deficit, which has contributed to the accumulation of debt. In addition, the country has faced a balance of payments deficit due to a gap between its exports and imports, which has put pressure on its foreign exchange reserves and made it more difficult to pay off its debts. The depreciation of the Sri Lankan rupee has also made it more expensive for the government to service its debts, as it must pay back its creditors in foreign currency.

The Sri Lankan government has taken steps to address the debt crisis, including seeking financial assistance from international organizations such as the International Monetary Fund (IMF). It has also implemented economic reforms and made efforts to increase exports and reduce imports in an effort to improve the balance of payments.

Graham Watson

Graham Watson has taught Economics for over twenty years. He contributes to tutor2u, reads voraciously and is interested in all aspects of Teaching and Learning.

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