Debt Crisis and National Bankruptcy: Evidence from Sri Lanka

Abstract

On May 19th this year, the central bank governor of Sri Lanka confirmed that the country could not repay its national debt due on April 18th in time (Jayasinghe & Pal, 2022). For the first time, Sri Lanka had defaulted on its sovereign debt since independence from Britain in 1948. It also announced its inability to continue paying for fuel (Jayasinghe & Pal, 2022). On July 6th, Sri Lanka declared national bankruptcy (Athas et al., 2022). This paper examined what led to Sri Lankan debt crisis and subsequent national bankruptcy and how the country could save itself from its situation. It analyzed secondary data from various published sources like news articles, journal articles, websites, and books. The study found that the country had high levels of external debt that outrun revenue. It also depends highly on imports to supply goods into the market. Its debt crisis was also influenced by economic shocks like the Russian-Ukraine war and the Covid-19 pandemic, which impaled production. Furthermore, the country's economic regulations were poor, making it unable to establish effective taxation, debt, and foreign reserve management systems. The company could improve its economic conditions by getting economic assistance from other countries and the IMF in the short term. Moreover, it also needs to restructure its foreign reserves and borrowings management systems.