May 2022 is a month that will always be remembered in the history of Sri Lanka as the month in which their country was declared bankrupt. Unlike corporations that have a legal framework for litigation in case of defaulting; national debts are totally a different landscape.

It should be noted that this is not the first time that a country has defaulted. Sri Lanka has simply joined a list of countries like Greece, Iceland, Portugal, Pakistan, Spain, and Argentina among several other countries.

Why do countries go bankrupt?

There are main five reasons why countries fail to pay their national local and international debts; poor monetary policy, political conflicts, government overspending, deterioration in key economic sectors, and irresponsible fiscal policy.

What happens when countries go bankrupt?

Whenever a country goes bankrupt, there is always an inflation crisis in the country and a high level of indebtedness within the country.

A country’s foreign assets can be impounded. However, assets without the country’s boundaries remain in the country’s custody.

The country tends to have trouble finding lenders in the future.

What is done to come out of national bankruptcy?

There are three things that are usually done once a country goes bankrupt. They can restructure the loan; that is agree on how much the country can pay. For instance, if the loan was $51 billion; in restructuring, you can carry forward the loan to a future debt but reduce the loan sum to a lesser amount.

Instead of paying $51 billion in debt, you can agree to pay only $20 billion because that is what is in your capacity to pay back.

The other option would be lenders forgiving their debtors while the last option would be a bail-out from institutions like the international monetary fund or other countries that are in a position to donate some funds.

In conclusion, the bankruptcy of the country is not equivalent to declaring a failed state rather it is like walking on clutches for some time until you regain proper strength to walk again.

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