It is now glaringly apparent that Sri Lanka’s finances in the last couple of years had been handled by a group of incompetent cronies who delivered the most inglorious of predicaments; a sovereign default. As Sri Lanka defaults on its debt, creditors have started to sue the country.
It is reported this week that a bond holder that holds over $ 250 million of Sri Lanka’s International Sovereign Bonds has sued the country in a United States’ Court. Hamilton Reserve Bank Ltd., which is registered in the tax haven of Saint Kitts and Nevis filed the suit this week in a New York federal court seeking full payment of its principal and interest.
The Central Bank announced in April this year that it would suspend all debt repayment until a negotiated restructuring with its creditors. After a 30-day grace period to pay $ 78 million expired in May with the Government unable to repay its lenders the country was officially in sovereign default or bankrupt in the eyes of the world. In total Sri Lanka is set to default on $ 12.6 billion of overseas bonds as the economy faces its worst crisis fuelled by a lack of foreign currency and surging inflation.
It is also reported that several of Sri Lanka’s creditors have now formed a group that will collectively negotiate debt restructuring with the Government. If the previous experiences of countries such as Argentina and Greece that faced sovereign defaults are to be considered these debt restructuring talks are going to be delicate, painful and complicated, requiring them to be handled with the highest degree of professionalism and competence. The creditors who are primarily private entities will not care about the state of the country or the wellbeing of its people when they negotiate a reasonable pay back scheme. Their interests will be primarily governed by the interests of their clients and the necessity to claim as much of the capital and due interest from Sri Lanka.
As witnessed in Argentina these talks can take many years and sometimes leave governments having to prioritise repayment of debt over interests of citizens. Creditors who can inundate a government, especially a third world incompetent one such as Sri Lanka, with international litigation, will squeeze governments to part with their foreign currency even forgoing basic requirements such as food and medicines for its people.
Therefore, the primary need of the hour is a competent group of officials advised by experts if necessary to negotiate a comprehensive debt restructuring program with Sri Lanka’s international creditors. A pre-emptive and proactive engagement can prevent lengthy and costly international litigation as the likes are now initiated by Hamilton Reserve Bank. The International Monetary Fund has also called on Sri Lanka to restructure its debt before it can negotiate a support program. The IMF noted in April that Sri Lanka’s public debt was unsustainable, and the country needs to take steps to restore debt sustainability prior to any IMF lending, including the emergency Rapid Financing Instrument.
None of the culprits that were responsible for the total economic meltdown ending in a sovereign default have been held accountable. Even worse is that there is not even a legal or administrative action initiated to find those responsible and hold them accountable. More than incompetence is responsible for the calamity and bona fide; there is enough evidence to suggest that there is malpractice and criminality in the handling of the finances of the country. As the negotiations for debt restructuring gets underway, those who are responsible for the current economic calamity should be held criminally responsible for the harm they have caused.