Sri Lanka, formerly known as Ceylon, has become the new headliner for a sovereign debt default. Until Russia technically falls into the same predicament (although for a slightly different reason – Russia has the financial capacity to pay sanctions that prevent it from settling the obligations of the Western-dominated financial system), the island nation, off the southern tip of India, was the benchmark in discussions of defaults, when the question is: who will be next?
Some Nigerians have even ventured to ask if this country is or will soon be on the same road as Sri Lanka. They are worried because they see similarities in the conditions of the two nations: growing debts and falling incomes.
“We are already close to the situation in Sri Lanka and we hope we can avoid it, but it won’t happen just by wishing it would go away,” says Dr Bongo Adi, Lecturer in Economics at Lagos Business School .
Sri Lanka defaulted in May after a 30-day grace period it had been granted for twice defaulting on interest payments expired. Bond interest rates are usually paid twice in 12 months. This involved two bonds, including its $1 billion 5.875% bond that matures in July 2022. The price of the bond fell to just 46 cents on the dollar.
The summary of Sri Lanka’s conditions was presented by Prime Minister Ranil Wickremesinghe, who told parliament on June 23 that the country was “facing a much more serious situation beyond just shortages of fuel, gas, electricity and food. Our economy has completely collapsed.
The dire situation in that country is such now that, according to the Prime Minister, the Ceylon Petroleum Corporation, its national oil company, has a debt of $700 million, and therefore no country or organization is willing to provide fuel, even for cash.
Why did Sri Lanka default? The country’s debts have increased, with external debt currently standing at around $51 billion, while revenues have dried up. Sri Lanka depends on tourism and remittances from its migrant workers for its foreign exchange earnings. Unfortunately, both sources have been cut off by the COVID-19 pandemic.
Since gaining independence from Britain in 1948, this is the country’s first sovereign debt default.
What should Nigeria do to avoid sinking deeper and deeper into this sort of bottomless pit that Sri Lanka has found itself in? Dr Adi says this involves a long-term strategy.
“To get the economy back on track, it won’t happen in four years. What this country needs is a ten-year project, but it has to start now,” he stressed.
According to him, it should start in the political arena: “Find someone who can make unpleasant decisions. We have to do our policy right by choosing the right person to lead.
Financial analysts point out that Nigeria still has some breathing room. Over the next two to three years, Nigeria will not have many bond maturities which could build pressure on the government for repayments.
During the period, the country will be saddled with monthly interest payments of around $100 million. So, based on cash flow, Nigeria has no pressure, they point out.
Nigeria has 13 eurobonds outstanding with maturities ranging from next year to 2051. The oldest is the $500 million, 6.375% bond from July 2023 and the $1.118 billion, 7.625% bond. % of 2025. These are the immediate deadlines the country faces, until 2027 when the $1.5 billion 6.5% bond will be due.
Nonetheless, with dwindling external reserves and declining oil production, the sooner policymakers took swift action to avert this looming risk, the better for the country.