By Uditha Jayasinghe

COLOMBO, (Reuters) – Sri Lanka, which has been hit hard by the COVID-19 epidemic, is now facing its worst financial crisis for years. This raises doubts over its ability to repay its creditors.

The island country will pay $500 million to an international sovereign bond. This is the first tranche out of $4.5 billion it must repay this year to avoid its first default in history.

Here are the key details about Sri Lanka’s mounting debt problems https://www.reuters.com/markets/asia/sri-lanka-debt-pain-will-go-china-wall-st-2022-01-11.

PROFILE DEBT

Through repeated borrowing cycles since 2007, Sri Lanka has amassed $11.8 billion in debt via sovereign bonds (ISB), the largest portion – 36.4% – of its external debt.

With a 14.3% stake, the Asian Development Bank (ADB), which has lent $4.6 million, is second. Japan sits at 10.9% while China stands at 10.8%. Both countries have lent roughly $3.5billion each.

Rest of the debt can be owned by nations such as India or international agencies like the World Bank and United Nations.

CHINESE LOANS

China has given billions of dollars over the past decade to Sri Lanka as part its Belt and Road Initiative. These funds were used for infrastructure projects, including roads, ports and coal power plants.

Critics allege that funds were being used for projects related to white elephants with low returns. China denies this criticism.

Sri Lanka has asked China to restructure https://www.reuters.com/markets/rates-bonds/sri-lankas-president-asks-china-restructure-debt-repayments-2022-01-09 its debt repayments to help navigate the financial crisis.

GOVERNMENT SUCCESSES MULTIPLE CHALLENGES

Inflation is rising at an alarming rate, with the government struggling to contain it. Also, it is struggling to achieve a target for a fiscal deficit of 8.9% of the gross domestic product.

Since November, Moody’s (NYSE:), Fitch and Standard & Poor’s ratings agencies have all downgraded Sri Lanka on debt default worries. Central bank governor https://www.reuters.com/markets/rates-bonds/sri-lanka-meet-all-debt-repayments-while-rebuilding-fx-reserves-cenbank-chief-2022-01-12 Ajith Nivard Cabraal has said the country will meet all its debt repayments in 2022.

SOME SAY RESTRUCTURE, DO NOT REPAY

According to experts, Sri Lanka’s debt should be restructured and a three year repayment schedule established.

It would be a good idea to save some money as well as lessen the financial burden for Sri Lankan citizens that are currently facing shortages of import goods, such gas, milk powder and fuel.

Sri Lanka has unreasonably made a commitment to paying off its debt. It is more prudent to press pause on debt repayment and take care of critical economic needs,” Verité Research Executive Director and Economist Dr. Nishan de Mel told Reuters.

REBUILDING FOREX RESERVES

Fitch predicts that Sri Lanka’s central bank will have to also arrange $2.4 billion for state-owned or private businesses in Sri Lanka in order to pay their 2022 debt obligations. These debt obligations are in addition to $4.5 billion of central government debt.

A total of $20 billion is needed by the country to import fuel, food, and intermediary goods that can be exported.

Although the reserves have been in a difficult level for several months, they grew to $3.1 Billion at December’s end thanks to a $1.5 Billion yuan exchange from China.