An Alternative View of Sri Lanka's Debt Crisis

Abstract

This article questions the validity of widely promulgated claims that Sri Lanka's debt crisis is the result of a combination of Chinese debt diplomacy and economic mismanagement in the form of fiscal and monetary excesses. The authors argue that if Sri Lanka has fallen into any kind of debt trap, it is an international sovereign bond debt trap. They further argue that the fundamental cause of the country's debt crisis is the failure of successive Sri Lankan administrations to transition towards an export-oriented manufacturing economy focused on producing increasingly technologically sophisticated manufactured products, and lay the blame for this failure on a combination of external and domestic forces operating in tandem with one another. Since the remedial action taken by the Sri Lankan government in the context of an extended fund facility arrangement with the International Monetary Fund is premised on the contention that the source of the crisis is the protracted fiscal and monetary excesses of successive Sri Lankan administrations, this action is unlikely to offer a permanent solution to Sri Lanka's debt problem — just as similar attempts to remedy previous debt and currency crises have failed.