Lanka Caught in Vicious Cycle

Sri Lanka, which has loaded up on Chinese-funded infrastructure, is sinking deeper into a debt trap as its currency weakens and economic growth decelerates to its slowest pace in 16 years, Nikkei reported. The Sri Lankan rupee has depreciated 3% against the greenback this year to 157.463 per dollar, according to forex data that the country’s central bank tracked on Friday. It is at its weakest point ever and has softened nearly 20% since President Maithripala Sirisena took office in January 2015. About half of Sri Lanka’s loans is denominated in foreign currency. As a result, “any further weakening of the rupee will increase the rupee value of maturing foreign exchange debt and interest payments”—driving the government’s financing needs higher, said Alex Holmes, an economist at Capital Economics. The country is caught in a vicious cycle: Investors devalue the rupee over concern about government debt, which then increases the nation’s obligations even further. Falling tax revenue prompts another concern as the economy grew 3.1% last year, the slowest since a contraction in 2001.