The government is like a family, it has expenses and income, and when expenses exceed incomes, the problem occurs, and it tries to solve it in several ways, including borrowing, but these methods may not succeed, which leads to the terrifying nightmare: bankruptcy.
The term state bankruptcy seems rather strange compared to the bankruptcy of people and companies, but state bankruptcy happens, and an Asian country that is about to reach this state at the moment is Sri Lanka.
A few days ago, there was talk that an Arab country, Lebanon, was about to declare bankruptcy.
Sri Lanka is experiencing the worst economic crisis in its history, as it is burdened with external debt of $25 billion, of which more than $7 billion is due this year alone, at a time when its foreign exchange reserves are declining, according to the Associated Press.
The difficult economic conditions in Sri Lanka, which reached the limit of borrowing to buy food, led to unrest. Protesters occupied the office of President Gotabaya Rajapaksa, demanding that he step down.
Experts say that it is expected that Sri Lanka will be declared bankrupt during the current year 2022, and the reason that has exacerbated the Sri Lankan crisis is the government’s significant tax cuts and increased spending.
In just 3 years, Sri Lanka’s foreign exchange reserves decreased from $7.5 billion to $3.1 billion.
The Corona virus worsened the situation in Sri Lanka, as more than a fifth of the population fell below the poverty line, according to the World Bank, which described the crisis as “a huge setback equivalent to 5 years of progress.”
state bankruptcy
And state bankruptcy is a metaphorical term. What is meant here is the government, not the state as a whole, and it means the government’s massive failure to pay debts.
Countries are usually given a period of 30 days from the date on which loan payments are due to pay what they owe, and if this does not happen, it is declared a defaulting country, i.e. a bankrupt country.
The bankruptcy of the government differs from the bankruptcy of individuals and companies, in the case of these creditors lay their hands on the assets of the defaulters, and this does not happen with the assets of the government inside its territory, but only outside it.
The solution proposed to avoid bankruptcy is to reschedule the loans and their terms or write off part of them, and then the country is called “faltering”, which is what Sri Lanka is currently seeking, as it wants to hold talks with the International Monetary Fund, its most prominent creditors, later this April.
The matter is not entirely negative, as the declaration of bankruptcy means that the state will partly forgo debts that have burdened it, but the negative repercussions are large and devastating, not the least of which is depositors withdrawing their money from banks, which causes an economic shock and ravages the value of the currency.
This is evident in Sri Lanka, where the shelves of shops are empty of basic goods, amid government rationing of what can be sold, amid warning of imminent, tighter restrictions on foodstuffs.
Even if the peak of the crisis is exceeded, its effects will still affect the living conditions in the debtor state, because it will employ a large part of its resources to pay off loans and their interests, depriving it of spending on development, for example.
There are many countries that have declared bankruptcy, such as Germany, Russia, Spain and Argentina.