The Economist - UK (2022-04-16)

32 Asia The Economist April 16th 2022

America isusedto beingblamedfor

things in Pakistan,however,andthearmy

has  already made soothing noises. Mr

Bhutto  Zardari’s Pakistan Peoples Party,

which  has got on better with America

when it wasinpowerinthepast,willtakea

prominentrolein thenewgovernment.

The  damageMrKhandidtobilateralties

will probablybeshort­lived.

Mr  Sharifwillalsohaveto dealwith

China. Whenheandhisbrotherwerelast

in  power,  theywereinstrumentalinset­

ting up the China­PakistanEconomicCor­

ridor,  a  packageofinvestmentfromPaki­

stan’s “ironbrother”inports,powerplants

and  other infrastructure. The initiative

slowed underMrKhanandseveralimpor­

tant  bits,  such as a new railway, have

stalled. It isunclearifthisstemmedfrom

mismanagement or cold feet about the

huge debts Pakistanwasrunningup.

Mr  Sharif’sgovernmentwillhaveless

influence onrelationswithPakistan’sclos­

est  neighbours.Thearmedforceshavea

lock on policytowardsIndiaandAfghani­

stan. GeneralQamarJavedBajwa,thechief

of the armystaff,saidonApril2ndthathe

wants  talks with India andis ready to

“move  forward”overKashmir,a disputed

region. TheborderbetweenIndiaandPaki­

stan  is  quietafterthepairagreedtostop

taking potshotsateachotherinearly2021.

Afghanistan,however,isadangerous

headache. TheTalibanremaininternation­

al  pariahs  despitePakistan’s attemptsto

persuade  theWesttoestablishtieswith

them. And thegroup’svictorylastyearhas

emboldenedPakistan’sownjihadists,who

have been carryingoutmoreattacks.

Mr Sharifwillnothaveaneasyride.His

coalition maybeunifiedinitsmomentof

triumph, butthatwillprobablyprovefleet­

ing. His niecehasforyearsbeenseenasthe

family’s  mostappealingstandard­bearer,

and  she  maynotwanttoremaininthe

back  seat  forlong. Elections,which are

anyway  duenextyear, couldbebrought

forward. AsforMrKhan,hewillnotdisap­

pear quietly.LotsofPakistanisbelievehis

allegationsthatperfidiousforeignersand

domestic traitorsaretoblameforhisoust­

ing. That populistgambitmaybepolitical­

ly shrewd, butit isalsodangerous.

Politics  isalreadypolarisedandmany

of Mr Khan’syoungsupportersarefurious.

In a poll conductedbyGalluponApril10th

and 11th, 43%ofPakistanissaidtheywere

angry  about Mr Khan’s defenestration.

Well over two­thirds,includinga majority

of  Mr  Sharif’s supporters, wanted early

elections.  MrKhan’sPakistanTehreek­e­

Insaf party isplanninga seriesofralliesto

pile  on  thepressurefora swiftpoll.The

large crowdsthatrespondedtohiscallfora

peaceful  protestthedayhewasvotedout

show  that  heremainsa forcetobereck­

oned with. MrKhanmaybegone,butheis

not forgotten.n

Sovereigndefault

Going for broke

S

ri lankahas  suffered  multiple  crises

and  nearly  three  decades  of  civil  war

since it won independence from Britain in

1948. But it had never failed to pay back its
debts.  That  changed  on  April  12th,  when
the  South  Asian  island  nation’s  finance
ministry said in a statement that it would
suspend payments on all foreign debt until
it had come to an agreement with creditors
on how to restructure the loans. The docu­
ment  stressed  the  country’s  unblemished
record of meeting its obligations. But con­
tinuing to do so, it said, “is no longer a ten­
able policy”. Recent developments, includ­
ing  the  economic  fallout  from  the  pan­
demic and the war in Ukraine, meant pay­
ing up had become “impossible”. 
Though wrenching, the decision to sus­
pend debt payments may be the first seri­
ous step towards fixing the country’s deep­
ening  economic  crisis.  The  government’s
admission brings it in line with the view of
the imf, which said last month that dwin­
dling foreign reserves had made Sri Lanka’s
foreign  debt  “unsustainable”.  P.  Nandalal
Weerasinghe, who took over as governor of
the  country’s  central  bank  on  April  7th
after  his  predecessor  resigned  amid  prot­
ests, said that halting payments would al­
low  Sri  Lanka’s  remaining  foreign  ex­
change to be used on imports of food and
fuel while the country negotiates with the
imfand other creditors.
The de facto default is the culmination

of a crisis that has been brewing for several

years in the country of 22m people. A slew

of ill­conceived tax cuts in 2019, combined

with a pandemic­induced collapse in tou­

rism,  prompted  rating  agencies  to  down­

grade Sri Lanka’s bonds in early 2020, in ef­

fect  locking  it  out  of  international  credit

markets. The agencies have since taken an

even dimmer view. Yet the government de­

nied that it needed help from the imfuntil

last month, spending its rapidly diminish­

ing foreign reserves propping up the rupee

and making debt payments. 

Matters came to a head in recent weeks

as power cuts of up to 13 hours a day, long

queues  for  petrol  and  cooking  gas  and

spiking  food  prices  drove  angry  Sri  Lan­

kans  into  the  streets  in  ever  greater  num­

bers. They demanded the government step

down.  Gotabaya  Rajapaksa,  the  president,

tried  to  quell  the  protests,  first  by  impos­

ing  a  state  of  emergency,  then  by  quickly

lifting it and appointing new ministers. 

Mr  Rajapaksa’s  slumping  popularity

and the failure of his attempt to intimidate

the public have further eroded his authori­

ty to deal with the crisis. But at least his re­

cent appointments have given Sri Lanka a

new  central­bank  governor  and  a  finance

minister who appear clear­eyed about just

how much trouble the country finds itself

in. The suspension of payments follows a

move  by  the  central  bank  on  April  8th  to

raise the interest rate by a staggering seven

percentage  points,  to  14.5%,  to  curb  run­

away inflation. Both men apparently hope

that  the  self­declared  debt  holiday  will  be

only  a  temporary  measure  to  gain  breath­

ing space as official talks with the imfbe­

gin on April 18th over the conditions for a

bail­out,  which  may  eventually  help  with

regaining access to global bond markets. 

Reaching a deal will involve a complex

set of negotiations. Sri Lanka owes around

half of its $35bn in external debt to private

bondholders  in  international  credit  mar­

kets. China and Japan are the country’s big­

gest  state  creditors,  accounting  for  about

10%  of  its  total  debt  each.  Restructuring

that will probably involve writing off some

of it. The imfis unlikely to offer a bail­out

unless  both  countries  agree  to  forgive  at

least  some  of  the  debt  owed  to  them,  to

avoid any fresh assistance flowing straight

back into China or Japan’s coffers. 

Such  agreement  may  not  be  forthcom­

ing.  China,  which  has  lent  large  amounts

of money to a host of other highly indebted

C OLOMBO AND DELHI

Sri Lanka says it will no longer service its foreign debt

Running on empty