Sovereign Debt

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The Sri Lankan government decided to default on all its sovereign debt worth $51 billion as it awaits financial assistance from the International Monetary Fund (IMF). 

What is Sovereign Debt?

• Sovereign debt refers to the debt issued or accumulated by any government.
• Governments borrow money to finance the various expenses that they cannot meet through their regular tax revenues. 
  • They usually need to pay interest on such debt along with the principal amount over time although many governments simply choose to borrow fresh debt to repay existing debt. 

• Historically, governments have tended to borrow more money than they could actually repay in order to fund populist spending.
• Features 
  • Governments can borrow either in their local currency or in foreign currency like the U.S. dollar. 
    • Governments usually find it easier to borrow and repay in their local currency. 
    • This is because governments with the help of their central banks can easily create fresh local currency to repay debt denominated in the local currency. 
      • This is known as debt monetisation and it can lead to increased money supply which in turn causes prices to rise. 
  • Debt denominated in foreign currency, say the U.S dollar, is difficult to repay as one depends on consistent flow of U.S. dollars into the economy.

Source:TH