For many years, Indian depositors looking for security and stability turned to fixed deposits (FDs). It was common practice to roll over FDs at maturity because it was thought that these investments yielded consistent returns. However, this strategy is being questioned in the current financial environment.
The yields on top bank FDs as of September 2025 range from 6.25% to 7.1%. Since inflation has been between 5.3% and 6%, the actual returns from foreign direct investments have diminished somewhat. The fact that their money isn’t increasing quickly enough to keep up with escalating living expenses is now an unwelcome reality for savers.
Given this changing situation, it is critical to investigate more sensible short- to medium-term options that offer flexibility, stability, and higher yields. Bonds stand out among these as a strong option, particularly investment-grade corporate bonds.
Fixed Deposits More Preferred Investing Domain for Indians
For the duration of the investment period, FDs give a fixed interest rate, unlike stocks or mutual funds. Because of this predictability, you can budget and manage your finances carefully because you know exactly how much your investment will increase. FDs are regarded as investments with less risk. In India, the Deposit Insurance and Credit Guarantee Corporation (DICGC) provides additional protection, up to a certain maximum, which lessens the risk of losing your main amount.
They are therefore a safe haven for your hard-earned money. Many banks now provide flexible options, but classic FDs lock your money in for a predetermined amount of time. While some FDs can be connected to your savings account for convenient access to a portion of the cash, others permit partial withdrawals throughout the duration. You can obtain credit when you need it by using FDs as collateral for loans.
The duration of FDs might range from a few days to several years. Whether you’re saving for a short-term goal like a trip or a long-term purpose like retirement, this allows you to tailor your investment to your specific needs. The method by which you get interest generated on your FD is up to you. You have the option to reinvest the interest for a compounding effect on your returns or to pick monthly distributions to augment your normal income.
Why FDs are Now Consider Old School
The purchasing value of your money may gradually decline because FD interest rates are often lower than inflation. Particularly for long-term investing objectives when you need your money to grow and keep up with inflation, this is an important consideration.
Conventional FDs limit access to your funds for the selected periodebt mud. Partial withdrawals and linked accounts offer some flexibility, but early withdrawals frequently come with penalties that can drastically lower your total earnings.
Not everyone will find this lack of liquidity acceptable. Interest income from FDs is typically taxable, which affects net returns in contrast to other investment options like Equity-Linked Savings Schemes (ELSS). For investors in higher tax levels, this might be a major disadvantage.
Alternatives to FDs
First off, compared to FDs, debt mutual funds offer a balance between moderate risk and the possibility of higher returns by investing in corporate and government debt instruments. They provide some diversity across various debt instruments and are typically less volatile than stocks.
Second, liquid funds invest in highly liquid assets such as certificates of deposit and treasury bills, making them perfect for emergency funds or short-term investment objectives. They may yield marginally higher returns than conventional savings accounts and enable simple access to your money with few restrictions on redemption.
Thirdly, purchase firm stock, which has the potential to see substantial long-term capital growth. But compared to FDs, equity funds are more volatile by nature and demand a higher level of risk tolerance. To withstand future downturns, investors should have a long investment horizon and be at ease with market swings.
Fourth, Recurring Deposits (RDs) help you develop a discipline and saving habit by enabling you to invest a certain amount of money on a regular basis. They can be an excellent choice for gradually increasing a corpus and frequently offer marginally better interest rates than traditional savings accounts.
Quick
Shots
•Fixed interest rates, various
tenures, compounding options, and use as loan collateral make FDs a reliable
investment.
•Real returns are falling as inflation
(5.3%–6%) erodes purchasing power, making FDs less attractive for long-term
growth.
•Premature withdrawals invite
penalties, and interest income is taxable, reducing net returns.
•Debt Mutual Funds offer higher
returns with moderate risk, diversification, and better inflation-beating
potential.
On 30 March, Vodafone Idea (Vi) announced that the government would increase its ownership of the struggling telecom carrier from 22.6% to around 49%. The government will achieve this goal by converting its outstanding spectrum auction dues into equity shares valued at INR 36,950 crore. Currently, the major shareholder in the telecom company is the government. Vi stated in an exchange filing that the Ministry of Communications has chosen to convert the outstanding spectrum auction dues into equity shares to be issued to the Indian government in accordance with the September 2021 Reforms and Support Package for the telecom sector. INR 36,950 crore is the entire sum that needs to be changed into equity shares.
Vi Directed to Issue 3695 Crore Equity
According to Vi, it has been instructed to issue 3,695 crore equity shares with a face value of INR 10 each at an issue price of INR 10 each. The Vi has to complete this task within 30 days after the issuance of the necessary order from relevant authorities, including from the regulatory authority, the Securities and Exchange Board of India (Sebi). The action will enable Vodafone Plc and the Aditya Birla Group, the company’s promoters, to maintain operational control over the business. The Department of Telecommunications (DoT) received a letter earlier this month from Vi Chief Executive Officer Akshaya Moondhra requesting additional conversion of the telco’s adjusted gross revenue (AGR) dues and spectrum usage charge payment instalments for airwaves purchased in the 2012, 2014, 2015, and 2016 auctions. The government permitted financially troubled telcos to convert a portion of their government debt into equity as part of the telecom reform package that was approved by the Cabinet in September 2021. After 16 months of talks, the government eventually agreed to Vi’s plan to convert INR 16,000 crore in interest liabilities owed to the government into equity in February 2023. The Centre then acquired a 33.1% share.
How this Move will Benefit Vi?
Vi chose to convert the interest on the moratorium into equity, as permitted by the reform package. Additionally, it preserved the possibility that the government can convert the principal of the four-year payment moratorium into equity when it expires in September 2025. Vi has significant payment obligations after October. Including principal and interest, the business must pay the government INR 12,000 crore between then and March 2026. It then has to pay INR 43,000 crore every year for five years, from 2026–2027 to 2030–2031, before that. Vi’s debts to banks and financial institutions decreased from INR 7,620 crore at the end of the third quarter (October–December) of FY25 to INR 2,330 crore. However, the corporation owes the government INR 69,020 crore in adjusted gross income and INR 1.38 trillion in postponed spectrum payment commitments.
In a regulatory statement on 25 March, Ola Electric Technologies Private Limited, a division of Ola Electric Mobility Limited, stated that it had settled its financial disagreements with the Rosmerta Group and that as a result, insolvency proceedings had been withdrawn against it. Earlier insolvency filings against Ola Electric Technologies were filed by the Rosmerta Group, which cited unpaid debts. According to earlier media reports, Rosmerta Digital Services demanded payment of slightly over INR 22 crore (about $2.5 million) in unpaid debts, while Rosmerta Safety Systems requested payments of almost INR 2.5 crore. The National Company Law Tribunal (NCLT) in Bengaluru received a request from Rosmerta to withdraw its insolvency proceedings after Ola Electric declared on March 25 that all outstanding debts had been resolved amicably. The business underlined its dedication to keeping solid business ties and making sure that any commercial concerns are promptly resolved.
Ola Clarifying the Mismatch of Data
This decision was made in the midst of Ola Electric’s operational optimisation efforts. Ola Electric also claimed that discussions with its vehicle registration vendors were the cause of a discrepancy in February between government registration data and sales data supplied by the company. The government has requested details on the issue, but the corporation claims that the backlog caused by the data mismatch has been resolved. According to the corporation, its sales are still strong, and the brief backlog in February was brought on by continuous discussions with our partners that handle vehicle registrations. With daily registrations surpassing 50% of its three-month daily sales average, this backlog is being quickly cleared. By the end of March 2025, the remaining backlog will be completely resolved, with almost 40% of the February backlog already cleared. On March 24, the shares of Ola Electric Mobility Limited closed at INR 55.72 per share. Ola Electric’s shares are down roughly 27% since listing in August, however they have somewhat recovered from a record low since it notified investors of the insolvency petition.
Over 1,000 Workers are Let go by Ola Electric
According to a media agency, Ola Electric Mobility Ltd., under the leadership of Bhavish Aggarwal, is laying off over 1,000 staff and contract workers in an attempt to reduce the company’s growing losses. As the electric two-wheeler (2W) manufacturer goes through a significant reorganisation, the employment cutbacks impact several departments, including procurement, fulfilment, customer relations, and charging infrastructure. In less than five months, this is the company’s second round of layoffs. About 500 workers were let go by Ola Electric in November 2024, and the most recent round of layoffs represents more than 25% of the company’s 4,000-person employment as of March 2024. However, since they are not included in the company’s formal disclosures, contract workers are not included in this statistic.
Following a number of years spent attempting to revitalize the company in the face of declining demand, Tupperware Brand is reportedly making preparations to file for bankruptcy as soon as this week, according to media reports.
After violating the conditions of its debt and enlisting legal and financial experts, the home-goods business, which has defined food storage for a significant portion of a century, is seeking to enter court protection.
After an extended time of negotiations between Tupperware and its lenders regarding how to manage more than 700 million dollars in debt, the company has begun the process of filing for bankruptcy. This year, the lenders reached an agreement to provide the company with some breathing room about the loan terms that were breached; yet, the company continued to decline. However, these plans are not yet finalized and may undergo modifications in the future.
Tupperware Made Several Re-Arrangements but Failed to Hit Profit
Tupperware has been warning for years that there is uncertainty over the company’s capacity to continue operating. It announced in June that it intended to close its one and only factory in the United States and lay off over 150 workers. Last year, as part of an effort to turn the company around, it appointed Laurie Ann Goldman as the new Chief Executive Officer. This was done in addition to replacing Miguel Fernandez, who had been serving as Chief Executive Officer, and other board members.
It was in 1946 when Tupperware made its plastic products available to the general public, following the invention of their flexible airtight seal containers by the company’s founder, Earl Tupper. To a significant extent, sales parties that were organised by suburban women were responsible for the brand’s explosion into American homes.
Throughout its nearly eight decades of existence, the company has maintained its reliance on direct sales conducted by a huge number of amateur vendors. As of the year 2022, the corporation’s regulatory filings estimate that it has more than 300,000 independent salesmen.
Other Companies That Have Declared Bankruptcy
In June 2024, Red Lobster filed for bankruptcy, which resulted in the closure of at least fifty outlets and the request to a judge for permission to close one hundred more. The seafood restaurant has been engulfed by problems, including questionable management by the private equity firm that controlled it and an Endless Shrimp campaign that went wrong, according to sources. All of these problems had been hurting the operation. Over the course of the previous month, it was bought as a component of a restructuring agreement.
In March 2024, the store of fabrics and crafts known as Joann submitted a petition for bankruptcy. A bankruptcy judge gave his approval to a restructuring agreement that enabled the company to keep its 815 stores operational while simultaneously reducing its debt by $505 million.
Earlier this year, in April, the clothing retailer Express filed for bankruptcy, and shortly thereafter, a consortium led by the brand management company WHP Global bought the company.
China has been one of the world’s leading economic powers for almost two millennia. Until the late 1700s, it accounted for approximately one-quarter of the global GDP (Gross Domestic Product). By the time the industrial revolution was beginning in Great Britain by 1820, China was accounting for approximately one-third of the global GDP. These numbers factually reflected that China’s GDP at the time was six times as large as that of Great Britain.
Under the leadership of Deng Xiaoping, the Chinese government began introducing economic reforms in the year 1978 which resulted in the country becoming the fastest-growing major economy in the world. China registered an average growth rate of 10% over the next 30 years. Its sustained growth rate could be attributable to its export relationships, its large-scale manufacturing sector, and the country’s low-wage workers.
As one of the largest economies in the world, the country was successful in avoiding the global economic downturn due to the Covid-19 pandemic. However, in the year 2022, it posted one of its worst economic performances in decades because of the pandemic.
As of the year 2020, the national debt of the People’s Republic of China stood at an approximate amount of USD 7 trillion. This amount was equivalent to around 45% of the country’s GDP. The off-balance sheet debt of Chinese local governments, as per the Standard & Poor’s Global rating, was amounting to approximately USD 5.8 trillion while the International Monetary Fund said that the debt owned by the state-owned industrial firms was another 74% of the total country’s GDP.
According to Forbes, at the last measure, China’s debt of all kinds – public and private and in all sectors of the economy – amounted to a staggering USD 51.9 trillion, which is almost three times the size of China’s economy. Since the time Beijing first began tracking such statistics, twenty-seven years ago, this amount is the highest level of debt recorded.
The Beijing-backed National Institution for Finance and Development has stated that local authorities are set to issue a new debt amount of approximately USD 570 billion for the next year. This precarious situation of China is further highlighted by its comparison of relative debt to the United States. By mid of the year 2022, China’s national debt was 40% higher than that of the US.
National debt refers to the outstanding financial obligation of a particular country and what the central government owes to its creditors. The amount of the national debt of a country represents the past annual budget deficits. It is incurred especially to maintain government services during a recession when tax revenues decrease and government expenditure increases. Government debt is also created to cover costs from major shocks like a war, a public health emergency, or even a severe economic downturn.
Reasons for China’s Increasing National Debt
In previous years, China had successfully managed to keep its national debt lower than the US. This was possible due to the policies that were introduced by the state. The national debt of China had usually been held by domestic institutional investors, in particular state-owned banks. The investment and lending practices of these banks supported government policies like issuing bonds for infrastructure investments and insurance companies.
However, in the last few years, the country has seen a consistently increasing national debt that has included government spending on development projects and slowing economic growth. The global financial crisis in the face of the covid-19 pandemic caused the state to inject more credit into government-owned enterprises. At the same time, Chinese authorities eased the way for companies to secure loans to restart the economy. This further increased the burden of debt on the country’s economy.
China’s Local Government Debt Crisis Explained
Impact of High National Debt on the Chinese Economy
China’s financial system is not entirely transparent. This is given rise to concerns about the amount of actual debt that is being held by local governments and state-owned enterprises. Other related concerns are also highlighted like the risks associated with high-level borrowing and the overall debt of the country. Having said that, China is hopeful of ambitious economic growth due to its heavy investment in infrastructure projects. The economy has also taken proactive steps towards a consumption-driven growth model, although, it is yet to yield results.
Despite the shadow that is cast on China due to its growing national debt, analysts remain optimistic about the country’s long-term prospects. They remain positive that although this will slow China’s ascent, it won’t derail the economy entirely.
Conclusion
The debt situation of China is set to grow further. There are two notable and significant issues impacting it. One is its demographic challenge with over 60% of the country’s population either retired or nearing retirement age. The second big concern is the country’s shortage of young workers which supports a growing aging population due to its decades-long one-child policy. This situation within the country is likely to continue for the foreseeable future and the country will rely heavily on debt to fulfill its social security pension obligations.
FAQs
What is the current debt of China?
As of the year 2020, the national debt of the People’s Republic of China stood at an approximate amount of USD 7 trillion.
What is National Debt?
National debt refers to the outstanding financial obligation of a particular country and what the central government owes to its creditors. The amount of the national debt of a country represents the past annual budget deficits.
The Islamic Republic of Pakistan was formed in 1947 after the partition of the British Indian Empire. The country was, initially, a dominion of the British Commonwealth until 1956, when it drafted and framed its own constitution. Ranked among the emerging and growth-leading economies through its rapidly growing middle class, the country’s political history since independence is characterized by periods of significant economic and military growth as well as economic and political instability.
Pakistan is geographically, ethnically, and linguistically diverse and is a member of the United Nations, the Shanghai Cooperation Organisation, the Organisation of Islamic Cooperation, the Commonwealth of Nations, the South Asian Association for Regional Cooperation, and the Islamic Military Counter-Terrorism Coalition.
It was Pakistan’s rising economic crisis that led to a political stand-off between the then Prime Minister Imran Khan and the current Prime Minister Shahbaz Sharif, who took office in April 2022. However, the country’s economy has been steadily dwindling as its forex reserves fell to a 9-year low reaching below USD 3 billion in early February 2023. The country’s currency, the Pakistani Rupee, has seen a steep fall to reach Rs. 271.50 against one US dollar. Inflation within the country is at a 48-year high with just enough foreign reserves to cover imports for less than a month. The country’s consumer price index in January 2023 had increased by 27.6% and the wholesale price index increased by 28.5%.
Unsurprisingly, the rising inflation has led to an exponential price increase in essential commodities like wheat, onions, gas cylinders, etc. To add to its woes, the oil companies of the country are on the verge of collapse due to the ongoing economic crises and its currency devaluation. This has also led to a lot of petrol pumps running out of fuel disrupting everyday life. The breakdown of the national electricity grid of the country also led to nationwide power outages, specifically affecting Karachi, Islamabad, Lahore, and Peshawar.
Pakistan’s rising expenses are adding to its troubles as the country’s high borrowing led to total debt and liability of Pakistani Rupees 59,697.7 billion in FY ’22. This amount was approximately 89% of the country’s total GDP. Unemployment and poverty are proving huge hindrances to food, healthcare, and wages for the citizens of the country.
Bail-Out Loans & History
By the year 2008, Pakistan’s external debt was Pakistani Rs. 6435 billion. Being an election year, Pakistan People’s Party came to power in that year and during its five-year tenure, increased the country’s debt by 135% to reach Pakistani Rupees 15096 billion by the year 2013. This amounted to 64% of the country’s GDP. A large increase in this debt was domestic with external debt increasing by 22%. Hence the external debt which was at USD 42.8 billion in 2008 reached USD 52.4 billion in 2013.
Pakistan’s Economic Crisis Deepens
The elections of 2013 brought Nawaz Sharif to power under whose rule, the external debt increased by 226.8% from USD 52.4 billion to USD 75.3 billion. The primary reason for this debt increase was the China-Pakistan Economic Corridor through which Pakistan procured loans from China and, in return, awarded contracts to only Chinese companies. This also resulted in high imports from China. Imran Khan came to power in 2018 and subsequently added to the increasing external debt to USD 110.6 billion during his rule.
As per IMF data, it has disbursed 21 loans to Pakistan over the years, the first request emerging from the country as early as 1958. Since then, IMF had agreed to disburse a total loan amount of USD 31.73 billion of which USD 20 billion has been disbursed through different transactions like Stand by Arrangements (SBA), Extended Fund Facility (EFF), Extended Credit Facility (ECF) and Structural Adjustment Facility Commitment (SAFC). An IMF loan is released in these different installments based on certain norms that are set by the lender.
Talks With IMF For Loans
Nathan Porter, leading the IMF mission began talks with the Pakistan government represented by their finance minister, Ishaq Dar, on January 31st, 2023. The talks failed to reach a satisfactory conclusion for Pakistan regarding its immediate requirement of USD 1.1 billion loan amount to prevent the country’s bankruptcy. The country is on the verge of defaulting on its external liabilities and is heavily dependent on the IMF’s loan. The loan amount is a part of the USD 6.5 billion loan program. IMF said – “Virtual discussions will continue in the coming days to finalize the implementation details of these policies.”
Conclusion
As inflation mounts and poverty rules the country, Pakistan is in dire need of monetary help from the IMF. However, this loan is also feared to increase inflation and price hikes for the common citizens of the country, further increasing their burdens. The ongoing Russia-Ukraine hostilities are adding to rising inflation around the globe as well. It remains to be seen, how the current government of Pakistan handles the ongoing economic crisis.
FAQs
Why is Pakistan in an economic crisis?
Pakistan’s economic crisis is caused by economic mismanagement, political uncertainty, high inflation and energy prices, and urgent foreign debt payments.
What role can international organizations, such as the IMF, play in helping Pakistan navigate its economic crisis?
IMF and other international organizations can help Pakistan by providing financial assistance, technical expertise, policy advice, and coordination to support economic growth, but such assistance may come with conditions that could be politically and socially difficult to implement.
What impact has the economic crisis had on the daily lives of Pakistani citizens, particularly those living in poverty?
The economic crisis in Pakistan has made it harder for people, particularly those in poverty, to afford basic necessities like food and healthcare due to rising inflation, unemployment, and expensive imported goods.
What is the impact of the economic crisis on Pakistan’s job market?
The economic crisis in Pakistan has led to rising unemployment rates, limited job opportunities, and job losses in the manufacturing, construction, and public sectors.
Money is a medium of exchange used to purchase goods and services. It has been used as a medium of exchange for thousands of years and is still in use today. Money is essential for most people in order to purchase basic needs such as food, clothing, and shelter. Money is also used to buy luxury items such as vacations, cars, and jewelry.
The value of money is determined by the demand for it and its supply. The demand for money is affected by the level of economic activity, the rate of inflation, and the interest rate. The supply of money is determined by the government, which can increase or decrease the amount of money in circulation by printing more money or buying back existing money.
Money is also used to store wealth. People save money in banks, investments, and other financial products in order to have money available in the future. Money can also be used to borrow money from a lender in order to purchase something that is not currently owned. In this article, we will discuss how you can use debt to make money.
Debt is money owed by one party (the debtor) to a second party (the creditor). Debt is usually evidenced by a contract or a promissory note and can be in any amount. It is usually repaid over an extended period of time with interest. To have debt, you can borrow money from a bank, credit union, or other lender and agree to repay the loan with interest over a set period of time.
You can also take out a loan from a family member or friend or use a credit card to make purchases and pay off the balance over time. Debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest. Debt can be secured by collateral or be unsecured.
Robert Kiyosaki is an American businessman, investor, self-help author, and motivational speaker. He is best known for his Rich Dad, Poor Dad series of motivational books and other material. His books advocate financial independence and building wealth through investing, real estate, starting and owning businesses, and increasing one’s financial intelligence. He has a lot to say about good and bad debts.
Key Debt Statistics for US Consumers
According to him, “good debt” is debt that is used to acquire something that will increase in value over time or generate income. Examples of good debt include student loans, mortgages, business loans, and investment loans. On the other hand, “bad debt” is debt used to finance something that will not appreciate in value or generate income. Examples of bad debt include credit card debt, car loans, and payday loans.
Robert defines debt as mainly consisting of two kinds, good and bad. Here we are going to learn how to differentiate between them.
Good Debt
Good debt can be defined as money borrowed to purchase items or services that will increase in value over time. Examples of good debt include mortgages and loans taken for education or starting a business. These debts are considered good because the goods purchased, such as a house or an education, will increase in value over time and can be used to generate income or provide other financial benefits.
Good debt helps individuals build wealth, increase their financial security, and become more successful. When used responsibly, good debt can provide individuals with access to new opportunities and help them achieve their financial goals.
It helps individuals manage their finances better by allowing them to spread out their payments over a longer period of time. Good debt can also help individuals build better credit, which can help them get better rates and terms on future loans. By taking on a smart loan, individuals can build a better credit score, which can open up new financial opportunities.
However, good debt should be managed responsibly and individuals should be mindful of the amount of debt they take on, the terms of their loan, and the interest they will pay. Individuals should only take on debt that they can comfortably manage and that will help them achieve their financial goals.
Bad Debt
Bad debt is a term used to describe debt that a person or business is unable to pay off. It is also known as a “non-performing loan” or “uncollectible debt.” Bad debt is typically the result of a debtor not being able to repay a loan or financial obligation due to either an inability or unwillingness to pay.
When a loan becomes delinquent or a debt is written off as uncollectible, it typically falls into the category of bad debt. This could be the result of the debtor being in financial distress, fraud, or an inability to pay the loan due to some other factor. It is important to note that bad debt is not necessarily the result of a bad decision on the part of the debtor but could also be due to circumstances out of their control.
The consequences of bad debt can be significant, especially for businesses. When debt is written off as uncollectible, it reduces a company’s income and profits, which can lead to decreased financial stability.
In addition, bad debt can affect a company’s creditworthiness, making it more difficult to obtain financing or loans in the future. For individuals, bad debt can also have a significant impact. It can reduce an individual’s credit score, making it more difficult to obtain credit cards, loans, and other forms of financing. It can also lead to increased stress and anxiety, which can have a negative effect on an individual’s health and well-being.
Fortunately, there are strategies that can be used to help manage bad debt. One of the most effective strategies is to negotiate with creditors to reduce the amount of debt owed. Additionally, it is important to keep track of payments to ensure that all debts are paid on time. Finally, it is important to develop a budget and stick to it in order to make sure that all debts can be paid in a timely manner. By utilizing these strategies, it is possible to successfully manage bad debt and improve one’s financial health.
Generating income from debt involves taking out a loan and using the borrowed funds to invest in an income-producing asset. This could include buying bonds, investing in stocks, or purchasing real estate. The income generated from this investment can then be used to pay off the debt. Other ways to generate income from debt include taking out a loan and investing it in a high-yield savings account or a certificate of deposit (CD).
Income generation through the use of debt involves borrowing money and using it to generate income through investments or other business ventures. This can be a risky strategy, as it involves taking on debt with the potential of not being able to pay it back.
Average Credit Card Debt of Top 6 Counties
There are several ways that individuals and businesses can use debt to make money:
Investing with Debt
Borrowing money to invest in stocks, real estate, or other assets that are expected to appreciate in value is a great way to make money using debt. This can be a way to leverage limited capital and potentially generate higher returns. Borrowing money to invest in stocks involves taking out a loan or using a line of credit to purchase shares of stock in a company. The hope is that the value of the stocks will increase over time, resulting in a profit when they are sold. This is known as “leveraged investing,” as the investor is using borrowed money to amplify their potential returns.
For example, if an investor has $1000 to invest and borrows an additional $1000 to purchase $2000 worth of stock, the investor is leveraging their investment by 2x. If the value of the stock increases by 20%, the investor would make a profit of $400 ($2000 x 20% = $400). If the investor had not borrowed any money, their profit would only be $200 ($1000 x 20% = $200).
Start a Business Using Debt
You can also generate income via debt by starting a business. Yes, it has its own benefits to start with little money and use debt to fuel growth. Debt financing allows a business to access capital that it may not have on hand, enabling it to invest in growth opportunities or cover unexpected expenses. It is also often more flexible than equity financing, as it does not require giving up ownership stakes in the business.
You can also expand your current business by leveraging debt to finance investments or expansion; a business may be able to generate higher returns on its capital. However, it is important to carefully consider the risks and potential drawbacks of using debt financing.
Expand a Business Using Debt
Taking out a loan to start or expand a business. If the business is successful, the income generated from the business can be used to pay back the loan and potentially generate additional profits.
Credit Card Arbitrage
Using credit cards to make purchases that can be resold at a profit. This is known as credit card arbitrage and can be a way to generate income, but it also carries the risk of high-interest rates on unpaid balances.
Leverage
Leverage is the use of borrowed money to increase one’s potential returns on investment. It can be used to increase the potential return of an investment, but it can also increase the potential risk of that investment. Leverage can be used to purchase assets, increase the return on existing assets, or hedge against risk.
Benefits of Leverage
Increased Buying Power: Leverage increases buying power, allowing traders to open positions much larger than their account balance would otherwise allow.
Reduced Margin Requirements: Margin requirements are substantially lower when using leverage, which means traders can open larger positions with a smaller account balance.
Increased Potential Profit: Leverage allows traders to increase their potential profit by investing more money than what is initially deposited.
Increased Risk: Leverage also increases risk as it amplifies potential losses just as it does potential gains.
Increased Liquidity: Leverage increases liquidity in the market as it allows traders to open large positions with a small amount of capital.
Harms of Leverage
Leverage’s primary harm is its potential to increase losses. Leverage magnifies both gains and losses, meaning that a small change in the underlying asset can result in a large change in the returns of a leveraged position. This makes leveraged positions more volatile than traditional investments, and losses can quickly spiral out of control.
Additionally, leveraged positions can be subject to margin calls, meaning that traders are required to add additional capital to their positions at short notice or risk having their position liquidated. This can cause significant financial losses in a short period of time. Finally, leveraged positions may incur higher costs due to the additional fees and charges associated with using leverage.
Conclusion
In conclusion, generating income from debt can be a viable strategy for investors. By carefully selecting the right debt instruments and using appropriate risk management techniques, investors can earn a steady stream of income while potentially also benefiting from capital appreciation. However, it is important to note that investing in debt carries risks, such as the risk of default or changes in interest rates.
Thus, as with any investment, it is crucial to thoroughly research and understand the risks and potential rewards before making any investment decisions. Additionally, it may be wise to diversify one’s portfolio to include a mix of debt and other asset classes in order to manage risk. Overall, generating income from debt can be a useful tool for investors, but it is important to approach it with caution and due diligence.
FAQs
What is debt?
Debt is money owed by one party (the debtor) to a second party (the creditor). It is usually repaid over an extended period of time with interest.
What is good debt?
Good debt can be defined as money borrowed to purchase items or services that will increase in value over time. For example, mortgages and loans are taken for education or to start a business.
What is bad debt?
Bad debt is a term used to describe debt that a person or business is unable to pay off. It is also known as a “non-performing loan” or “uncollectible debt.”
What is leverage?
Leverage is the use of borrowed money to increase one’s potential returns on investment. It can be used to increase the potential return of an investment, but it can also increase the potential risk of that investment.
How can I use debt to make money?
There are several ways that individuals and businesses can use debt to make money, like:
You can hardly predict some cancers before it grabs the whole body to an extreme stage. Basically, hyperinflation is a wolf under the sheepskin. The news, the experts, the cunning industry, and even the government may hide the truth to protect the aftermath. Many companies employ a widespread technique to convince the consumers that costs are stable, even though you’re paying more for less weight with the same packaging. Hyperinflation is a negative catalyst that may act slowly but steadily to summate long-term accelerating inflation. So, we will go through 7 case studies of hyperinflation-affected countries of all stages (growth, maturity, and decline) in the economic graph.
Hyperinflation is a terrible stage of uncontrolled inflation with a sustainable panic of supply shortage despite paying more. A country has to face the problem when it has enormous national debt, declining foreign reserves, and long-term political uncertainty. In external events, such as war, and lack of global confidence in the economy, worldwide pandemics push the problem to a negative slope. A government will fund its reaction to the crisis by taking on debt, but it can’t afford services and releasing additional money in the market to make up the difference. Twitter co-founder Jack Dorsey’s tweet at the end of October 2021 fuelled the panic of hyperinflation across the US amid the tough time of the pandemic.
Global Inflation Rate from 2016 to 2021
Countries that Faced Hyperinflation
Hyperinflation is a dreadful state of condition for any country. The following are some prominent countries that faced hyperinflation and the reasons behind them:
Russia
The world’s second-largest arms and crude oil exporter, Russia is heading towards significant inflation, possibly a burst into hyperinflation. The economic data coming out during the Ukraine invasion is not very healthy. Apart from the war, the Kremlin is fighting with an internal three-point trap triangle of (hyper) inflation-pandemic sanctions. As per reports, the Russian regulatory bank called CBR raised the interest rate by 20% to save the ruble from the western red eye of sanctions. As a result, the ruble tanked at a record low of 25% this March.
Amid fear of losing oil and arms export hegemony, the country faces isolation from the West and the US. Investors are trying to get into a safe escape. Many billionaires shut down their business operations as a protest. The economy is being drained of cash. One month down the line of conflict, Moscow enrolled with 3.5 lakh Ukrainian refugee shelter houses, and inflation zoomed up 15.66% this March-end, expecting a 20% fear of inflation in this financial year as per a central bank survey. SWIFT system and payment card firms are ceasing operation in Russia, which is a significant setback for the country. The CBR is struggling to control capital outflow( movement of an asset out of a nation), escalated by the record-long shut down of the Moscow exchange.
Moscow’s financial advisors have shown public confidence to revive their internal banks with additional reformation. It will take some time to confirm the post-invasion period Russia copes with the odd or cross the red inflation line to join the hyperinflation club. Though, as per experts, it has intense symptoms of hyperinflation.
Russia’s Ukraine Invasion
Iran
In March 2022, the Statistical Centre of Iran (SCI) reported an annual inflation rate of 40.2%. The Islamic Republic owned 10 % of the world’s oil, 15-17% of its gas reserves, and 7% of its minerals. So then, why is Iran also sinking towards hyperinflation? Literally, Iran has everything for cooking except the cook!
Weak diplomacy also pushed EU and US sanctions on energy, tech, financial service, and foreign trade. Iran’s president asked its central bank to stop releasing data as it is higher than the SCI tally. Diplomatic gaps weaken the trade deficit.
The country is suffering from basic needs like water. Protesters rioted in Tehran’s streets, resulting in deaths and arrests. The country is accused of state-sponsored disinformation, a dangerous trend to hide the disease rather than treat it.
A silver lining of hope is raised after the US Congress gets its new president from the democratic party in January 2021. Iran is trying to get the Indian market oil with a rial-rupee deal. The US-Tehran has shown some positive signals of melting down relations with the nuclear deal ahead of the Russia-Ukraine war.
Turkey
Ankara crossed the 50% inflation red line and entered the hyperinflation zone with a 54% index as of March 2022. Despite president Recep Erdogan’s battle with the recession, the Turkish people have not achieved a new normal since 2018. His equation to fight inflation is lowering the interest rate. Unfortunately, his flawed policy slipped the currency lira to a loss in the last year. The uncontrolled depreciation of the lira has created a hugely detrimental impact on the economy. There has been a certain increase in the exports, but the following adverse consequences are more than the actual gain:
The significant drop in purchasing power is the result of devalued currency; the salary class people need to pay more lira for the same or less product. Therefore, the loss of purchasing power is a severe impediment to economic growth.
To minimize the inflation risk, Turkish banks have stopped encouraging lending to ensure less money in the market. It has no option when they are unable to raise interest. In the long run, it has an even worse effect on increasing the country’s brain drain. Foreign currency is taking a break, and investors are rushing out of the country. This leads to job or employment problems at worst.
The civil war inflicted on Lebanon’s lira is losing the battle and ending in triple-digit inflation of 215% in front of the US currency. It is enough to cripple the retail, health, transport, and fuel sector investment. With 78% poverty, the country is trying to get a good deal from the IMF. But the corruption grappled the country at such a deep level that its central bank had to face inquiry and slap from the lawsuit. The United Nations confirmed that the Ponzi scheme was a major red flag behind the economic meltdown. Beirut tried to reshape its economy with tourists to the Gulf help. But in 2011, the neighbouring Syria unrest put the country in financial collapse again. In the meantime, the Hezbollah-Iran tie miffed some major gulf countries.
The fall of money was fuelled by the central bank’s direct financing of the government’s public deficit during the civil war. As a result, money has entirely lost its essential rules and everything that made it a reliable store of value. The Govt, despite a defaulter of foreign debts trying to survive with the help of the World Bank and IMF. Another good news is, recently, the new Lebanese govt got a ‘positive outcome’ certificate from the Saudi kingdom. Hope it will improve their credit pipeline.
Sudan
After a military coup, riot, and political uncertainty, the East African nation is more chaotic; debt-trapped Sudan announced it would float its currency as economic conditions deteriorated. According to United Nations officials, Sudan’s food crisis is expected to drop due to the African country’s economic collapse, displacement, and ruined harvests. After the military took over the US, IMF and World Bank suspended their million-dollar aid and SDR (special drawing rights of IMF). Another setback is that the separate region of South Sudan holds 75-80% of oil production in the Upper Nile state.
Since 2016, the country has faced a lopsided economic downturn, covid and coup pushed it on the verge of catastrophe. With the shrinking GDP of 2020 by 3.6%, the country summed up the cycle and added a 359% inflation rate. World food program data warned that about 5.8 million people suffer food shortages and malnutrition. In the current scenario, the political paralysis of Sudan is a significant issue of hyperinflation and food shortage. Moreover, it blocked the foreign fund in the African nation.
Inflation among countries
Zimbabwe
Are you fed up with hearing about hyperinflation in different countries? Here is Zimbabwe for you with a ray of hope. The government had robust growth of 838% inflation in July 2020, and now, there is a significant drop at 50% in August 2021. During this challenging time of pandemics, war, and sanctions, it is not easy to revive the economy from hyperinflation in such a short period. Chronic symptoms of hyperinflation are coming out like lower growth, hunger, a debt-driven economy, low income, jobless youth, and collapsing health sector. It was not fun when the African bread bucket turned half of the population into a beggar.
It was a tough time for the drug-addicted, debt-ridden country when it was announced as having the highest inflation rate in 2019. With a fast depreciating currency and hyperinflation nearing 800%, most commoners watched their hard-earned money turned into a paper bunch. The country suffered 90% unemployment which coerced University graduates to sell vegetables in the market. The confused Reserve Bank of the country introduced a bond note with a 1:1 value against the dollar, but the market doubt was fainting its importance rapidly. In 2019, the Reserve Bank announced RTGS$ and banned foreign currency in domestic transactions.
Pandemic norms encourage digital payment worldwide, and it was reshaping the economy of Zimbabwe. It pushed the RTGS to POS transactions. EFT(Electronic Funds Transfer)and the Card payment system showed robust growth in 2021. Thus, it saves money printing the ‘need’ of a hyperinflationary economy. The rural part also enjoyed financial inclusion (finance access to the poor class), and the govt can track them with the tax system. The untapped section is directly under the payment system. Online transaction access to the internet among youth generates various business ideas worldwide. Bitcoin and crypto came to the discussion table of policymakers.
Venezuela Inflation Rate as Compared to Previous Year (by Statista)
The South American Country seems to be the king of the hyperinflation kingdom without any competitors nearby. In 2018, it reported 65,374.08% inflation, which means people need to carry money in a car dicky for daily retail shopping. A bunch of cash becomes useless in the economy. In the same year, 48k teachers left the country (remember, they are not sacked) to relocate to neighbour-based countries for livelihood.
There was a mass exodus in the middle of 2018. About 4 lakh people left the country, and it was not for armed conflict but terrible hyperinflation. Among the country’s top human resources, doctors, professors, and IT professionals were fleeing the country, leaving unfilled posts. The country faced mass blackouts, and people used candlelight or cell phones during an emergency. The country dried out of medical supplies and doctors; patients had to wait for half a year for an emergency operation.
Critics blame policies of socialism. Experts accused the country of suffering from printing money and a fiscal deficit. Once known as the giant supplier of crude oil, the comfort of the oil zone hit back Venezuela in 2014 after oil prices fell continuously. Since 2014 the country has shown a significant drop in GDP in negative growth.
There is a thin sign of revival in 2021; Venezuela reported a surge of the foreign reserve by $5.1 billion. The country’s central bank claimed to curb inflation by ‘only’ 686% for the same year, a great short-term relief.
Conclusion
Here we did not consider the crisis-hit Sri Lanka or war-torn Ukraine. Moreover, since August 2021, Afghanistan has been out of the internal statistical audit.
Therefore, there is a high possibility that the hyperinflation club will get new members. On the other hand, controlling hyperinflation is far more difficult due to the enormous political cost of the typical solutions. In reality, one reason that can turn inflation hyperinflationary is the populist administrations, which are being trapped in a situation where they cannot make practical efforts to reduce inflation.
It is better to control it in the inflation stage. So, the policymakers or government need to take some bold and reformative steps to prevent the money flow in the economy. It also needs diplomatic efforts, so that the countries can avoid printing $100 trillion notes like Zimbabwe.
FAQs
What is hyperinflation?
Hyperinflation is extremely high and rapidly increasing inflation. It is said to have occurred in an economy when the prices rise over 50% in one month due to economic disturbances and depression.
What causes hyperinflation?
The main causes of hyperinflation include:
High National Debt
Price control that leads to an increased shortage
Economic output decline
Lack of faith in government
Which countries are facing hyperinflation?
Venezuela
Sudan
Lebanon
Iran
Zimbabwe
What is a healthy inflation rate?
A healthy inflation rate is 2% which is considered good for economic growth as in this situation, people are more likely to make purchases in the present rather than wait when they expect prices to rise.
Buy Now Pay Later – It’s convenient, accessible, and consumer-friendly. But, is there more to it?
India’s BNPL market is estimated at around $3 billion as we write this, but, it is about to explode if data science is to be believed. The predictions hint that it will be among the top 10 fastest growing market sizes in India, and in just 4 years, it would be at $45 billion!
For an industry that big, regulation has to be fail-proof.
In a recent directive, the Reserve Bank of India (RBI) has made it clear it doesn’t trust these BNPL companies. RBI has decided to look deeper into their business models and how they extend credit lines via Prepaid Payment Instruments (PPI) to their customers, when there is a clear lack of…almost everything: Transparency, Administration, Licenses, and above all, A SYSTEM!
To be clear, RBI hasn’t come down cold on just BNPL, it is looking at non-bank fintech lenders and even smaller banks that use PPI to load their wallets or extend credit lines.
But, wait, let’s take the story right from the start. Too many questions, right!
What is BNPL? What is PPI? Why is the RBI up on its case? What does it look like for users?
What Is BNPL?
To begin with, the idea of buying now and paying later isn’t so new. You may be surprised to know it all began in the late 19th century when businesses around Europe started extending loans to industrialists. These loans were material-based. Industrialists had the option to buy goods and pay for them later. Of course, in this model, they had an interest rate.
In the early 21stcentury, fintech providers made “Buy Now Pay Later” a digital facility.
In the way BNPL goes around now, there is a no-interest period today. Buy Now Pay Later is a scheme where a consumer, such as yourself, can purchase an item without paying for it instantly.
Though you will be required to pay back, it gets easier for those who don’t have cash. Instead, you get to divide the cost of the goods in the form of an easy installment or zero-interest loan.
The payments can be made within 90 days, unlike conventional loans that go on for years. Now, if you settle the payment within the pre-decided time frame, you pay no interest. But, if you cross it, yeah, there is going to be a penalty on the overdue.
This is the basic working of the BNPL utility.
BNPL has made quite a mark. 60% of people making purchases online have used BNPL services. Major players in India include Jupiter, Ola Pay, Postpe, ZestMoney, LazyPay, and Simpl.
Their data show that most of their users are 18-25 years old. The millennial generation made up to 20% of the BNPL users. In 2021, ZestMoney published a report saying that their millennial users increased by 2x, and their GenZ customer base grew by 3x during the pandemic alone.
What Is So Tricky About BNPL?
Debt
Even though BNPL is marketed insidiously as a convenient paying option or a way of life, BNPL is still a debt. When you opt for BNPL, most financial institutions open a loan account in your name. This loan account is added to your credit history.
Credit score
Once a loan account in your name is opened, this small debt is added to your credit score. If you default on a single payment, it will go into your credit history. This could affect your credit score and loan-taking ability too.
Regular shopping via BNPL is a ticking bomb
The BNPL scheme was introduced to capture a market of 300 million households in India, which did not have the credit score to afford things.
Tier 1 and 2 cities saw more men spending on fashion and lifestyle while women used BNPL for upgrading their electronics and education. During festive seasons, BNPL services were used 10x more for purchasing smartphones, electronics and fashion.
Transactions through BNPL services increased by 200% during festive seasons on apps like Amazon, Myntra and Flipkart. Surprisingly people also paid for their travel costs through BNPL services.
How Customers in Different Cities Spent Using BNPL
When almost everything is purchased with an option to pay later, we run into a liquidity freeze. We also run into more chances of late payments and bad credit scores.
High-interest rates
If you default in payment of this loan, apart from your credit score getting affected, you will be liable to pay interest of about 30% to 45% per annum.
Spend more
The Buy Now Pay Later scheme makes you purchase more items by spreading the installments out conveniently over months. Even though these installments are easy to pay, you still pay a higher extra cost. An alarming 59% of BNPL users admitted that they spent more by using the services.
Young users
Most of these BNPL companies have young users with no credit score. No one in the credit market will give them a loan; therefore, BNPL is the only way to purchase what they want.
What makes this worse is that most of these BNPL users do not have a job to pay off these loans. They are likely to default or go under major financial stress. This is reflected in the 5% default rate of payment for ZestMoney, a top BNPL market player in India.
Inflation
No one realises that a BNPL utility might as well have a floating interest rate with it. A fixed interest rate doesn’t change for the tenure, irrespective of RBI’s repo rate. However, floating rates do. An increase in inflation will increase the interest rates. This could impact the loan bearers negatively.
Lack of transparency
Most firms are opaque in their loose regulations to get more customers. For instance, take the interest rate: is it floating? Is it fixed? In fact, take the recent RBI directive. No BNPL issuing lender has officially declared the ongoing probations and how they plan on complying. It is estimated that these new rules will impact 8 million users in India, who are yet to hear a plan to course-correct this.
How Often Customers Used BNPL Services in 2021
What is PPI?
Prepaid Payment Instruments are essentially cards, wallets, or any other avenue where you could store your money, and later use it for shopping, remittance, and even investments.
Now, the problem with using credit lines to load your PPI is that the customer doesn’t really have that money.
But, they can spend it! they can also default payments that he/she has to make to the credit provider. This creates a gap. Hence, the RBI directive.
So, is this a bubble waiting to burst?
Conclusion
Well, history would point out that BNPL has been a mess in the past as well.
A tragic example of the BNPL scheme was the 2002-2008 market crash in America. Many people were offered house loans at a 0% interest rate during these years. The policy-writing and interest regulations were dodgy, and the result was that borrowers defaulted and ended up without houses but with loans to retire.
The RBI tightening its fists against loose financers is a step in the right direction if it meets execution without much ado.
FAQs
Is BNPL available in India?
Yes, the BNPL model is available in India and has gained massive popularity since it was introduced in India. many consumers are purchasing smartphones, electronics and fashion products.
What are the risks of BNPL?
High-interest rates, lack of transparency, overspending, and huge debts are some of the risks related to BNPL.
Why is Buy Now Pay Later so popular?
Consumers prefer BNPL as they can buy their favourite products without worrying about paying the money upfront.
Economics has always been an important thing for a country. You may not like the subject in your school but it is something that is super real in nature. It is basically the allocation of resources to achieve the most optimum efficiency. As the number of people grows in a country, so does the responsibility and the load to be more active and unbiased in every sphere of allocation of resources. Good allocation of resources is important because resources are finite.
If not managed well, the whole economy can just crash, however big or small the economy is. This is what we are reminded of every now and then. This unusual year brought up the news of a country getting economically unstable. The country is Sri Lanka and it is in a really serious economic condition. The people of Sri Lanka are facing extreme situations associated with their economy. This article focuses right on the same topic.
Read this article to know about what is happening in Sri Lanka and what the world is saying about it, how the country plans to get out of this tight phase and much more. Here we go,
A Little Brief About the Sri Lanka Economic Crisis
Recently, the news broke out about Sri Lanka from which we came to know that the country to the south of India is facing a financial crisis and there are fears of bankruptcy. News resources reported that Sri Lanka is in a super tight place right now and it might have extreme economical conditions in the near future.
The Sri Lankan foreign reserves have hit a record low where the commercial banks are failing to secure “dollars to finance imports of food, fuel and medicines”, as says Deccan Herald. All of these started with the outbreak of the COVID-19 pandemic, which devastated the country’s tourism sector, a pivotal industry of the Sri Lankan revenue, and also reduced the foreign workers’ remittances.
To save the country, the Sri Lankan government announced a broad import ban in March 2020. However, this backfired in the form of shooting the food prices up by 25%, as per the reports of February 2022, and has contributed to an overall inflation of 17.5%. Furthermore, the country is also facing 5-hour electricity blackouts each day because the thermal generators have run out of fuel. According to the reports, the country is still battling its $51 billion sovereign debt.
It has been heard that he Sri Lankan government had received a $1.2 billion economic relief package from India for a cure. This economic relief package, as announced by the government on January 4, 2022, amidst the ongoing forex crises of the country, ensures that the Sri Lankan government is optimistic about their future. They want to communicate that the country will not default on its international debt.
The Current Situation in Sri Lanka Due to the Crisis
The GDP of Sri Lanka over the years
Sri Lanka’s external reserves were dropped severely in November of 2021. The fall marked the external reserves to $1.6 billion. This fall triggered alarm in most of the domains and quarters of the country. Concerned people warned about this in the government. Economists and Think tank’s warned that this fall in foreign reserves will mean a sovereign default in the future.
American credit rating organisation ‘Fitch’, after the event in Sri Lanka downgraded the nation’s rating to CC. A CC rating is the lowest rating just before the defaulter tag. It is to be noted that Sri Lanka had a piling pile of feigning debt over the last few years. However, the island has never defaulted on any of the foreign debts until now.
Fitch Ratings of Sri Lanka
This downtrend in the year 2020 is seen as the record breaker for Sri Lanka. The current situation is seen as a super meltdown and has impacted the whole island. Living costs are rising impeccably, food shortages are forecasted up this year and as per the reports, Sri Lanka will likely default on the debt that it has accumulated.
Having said about the economic crisis and the depleting foreign reserves, there are many issues that Sri Lanka is facing right now. Inflation is seen at an all-time high in the country and the basic living conditions are getting costlier. Food prices are skyrocketing and its treasuries are shrinking.
The economic crisis that the country is facing right now is inhumane and the hole is too deep to get out from. The country appears to be staring at a human crisis that will hurt not only the growth rate in the pandemic era but the basic sustainability index of the country.
According to World Bank estimates, 5 lakh people in Sri Lanka have fallen below the poverty line since the pandemic struck, which it described as a “huge setback equivalent to five years’ worth of progress”.
The World Bank has estimated that about 5 lakh people have fallen below the poverty line and this trend started during the Covid 19 pandemic. This setback was so deepening that it took away Sri Lanka’s five years worth of growth with itself. This is a huge shock for the economy of Sri Lanka and the people who make up the economy.
In further reports, it is said that the country’s economy has contracted by 1.5%, just by the end of the third quarter of 2021. With the new year 2022, it is not going to be easy for Sri Lanka to sustain itself as there are real concerns about the country going bankrupt.
The government, however, said Tuesday the country will not default on its international debt as it announced a USD 1.2 billion economic relief package.
Finance Minister Basil Rajapaksa said Sri Lanka would duly pay the international sovereign bond of USD 500 million due in a fortnight, a PTI report said.
Sri Lanka, which is an Island to the south of India, is a great tourist spot. It is estimated that tourism revenue makes up about 10% of the island’s GDP (Gross domestic product). This was the usual rate in the island country.
With the onset of the Covid19 pandemic, this rate was badly hit and the tourism sector came to a sudden halt. This had really a cascading effect on the earnings of the nation. However, every other major tourist destination faced this issue but the effect was real. Magnified on Sri Lanka as the tourism there makes up a good chunk of the GDP.
While the halting of tourists was a good attack on the economy, there were some other reasons as well. The other ascertained reasons for the fall would include, Heavy Expenditures. The president of Sri Lanka, Gotabaya Rajapaksa did some hefty expenditures during the year.
Gotabaya Rajapaksa – President of Sri Lanka
His government tried to cut taxes from people that impacted government revenues. More and more spending led to less and depleting foreign reserves and thus the reserves hit a rock bottom. The country is very high on loans and grants and has China as a major debt partner. The Guardian recently reported that Sri Lanka has massive debt repayments to China alone.
Sri Lankan rupee (Currency of the island) crashed too. This is basically termed as ‘Inflation’. Inflation reached a record high in Sri Lanka, and is rising continually, leading to a spike in food prices, which was the reason for worry for the common citizens of the country. Reacting to the rise in inflation, President Rajapaksa announced an economic emergency in August 2021, just a couple of months before the foreign reserves crash. This emergency was implemented to control the situation and contain it. The effect was to lessen the hoarding of items by people in their homes, which could lead to more severe shortages.
Four months went by and as the inflation rose more, basic goods became unaffordable for the general public. Not just that, it has been reported that even well off or socially rich people are having trouble affording basic needs and wants. These many months, the citizens of Sri Lanka faced a tough time to make both ends meet.
The government had appointed a former army general as commissioner of essential services, giving him the power to seize food stocks hoarded by traders and retailers, and ensure essential items were sold at prices set by the government, but little was done on the ground to lift people out of their misery, the Guardian report said.
What Sri Lanka is facing right now is inhuman and horrendous. The economic conditions there have seen very tight phases but this phase is the most horrific. Adding to that, this is when the whole world is facing a global pandemic which could lead to any ruins. This has broadened the possibilities of Sri Lanka going bankrupt. After witnessing a drop of 70% in foreign exchange reserves during the past 2 years, the government of Lanka and the people of the island country, are experiencing a currency devaluation and are looking forward for help from the global lenders. According to the latest news dated March 28, 2022, Sri Lanka, which is a country for 22 million people, is struggling to pay for essential imports Let us see what the numbers and opinions about the country say.
This is not a certain statement but the probability of this country going bankrupt has never been this high. It has been reported that the country is super deep in debts and owes tremendous amounts to other counters. Here we are presenting a few stats that prove the misery of Sri Lanka.
Sri Lanka owes an amount that is more than $5 billion to China. This is probably the biggest amount of debt that the country has ever taken. The country is paying the China debt in instalments.
Not only that, but Sri Lanka is also a debtor to Beijing for $1 billion, which it took to overcome the previous acute crisis. Along with the major countries and regions that Sri Lanka owes money to, it is reported that there are many private and government entities that it owes money to. This situation of enormous debts and depreciating foreign reserves can be a ‘Checkmate’ situation for the republic of the nation.
“We have high debt from three countries — China, Japan and India. The total outstanding for this year would be USD 6.9 billion,” FM Rajapaksa, the younger brother of President Rajapaksa and Prime Minister Mahinda Rajapaksa, was quoted as saying in the PTI report.
The finance minister of Sri Lanka openly announced the amount they owe to countries. He said that Sri Lanka owes a sum total of about $7 billion to countries like China, Japan and even its neighbour, India.
Sri Lanka’s huge foreign debt burden is one of the main reasons for its economic crisis. As of November, foreign currency reserves available with the country were just $1.58 billion, down from $7.5 billion when Rajapaksa became the president in 2019, the report said.
National debt of Sri Lanka
Amid the falling environment, the opposition party in Sri Lanka also took a dig. An opposition member of parliament, Harsha de Silva (who is also an economist) told parliament that foreign reserves would be in the negative if the rate of decline continues. Moreover, the Sri Lankan newspaper ‘Daily mirror’ quoted “The nation will go totally bankrupt”.
Opposition MP Harsha de Silva, who is also an economist, told Parliament in December that the country’s foreign currency reserves would be minus $437m by January, and the total foreign debt services would be $4.8 billion between February and October 2022. “The nation will be totally bankrupt,” Sri Lankan newspaper Daily Mirror quoted him as saying.
De Silva said he was not trying to scare anyone but it was a reality that “all imports will come to a halt, the entire IT system will be shut down including the google map as we will not be able to pay for it”.
The government has, however, always made an optimistic approach and has insisted that it can meet the obligations.
Minister Ramesh Pathirana has said they would try to settle past oil debts with Iran by paying them with tea. Sri Lanka plans to send $5m worth of tea every month to Iran to save “much needed currency”, The Guardian reported.
Ministers are worried about what the future may look like and all they want is to minimise the damage.
Central Bank Governor Ajith Nivard Cabraal has also said that Sri Lanka would be able to pay off its debts “seamlessly”.
Former central bank deputy governor WA Wijewardena, however, told The Guardian that there were high chances that the country would default on repayments, and that would have catastrophic economic consequences.
“When the economic crisis deepens beyond redemption, it is inevitable that the country will have a financial crisis too. Both will reduce food security by lowering production and failing to import due to foreign exchange scarcities. At that point, it will be a humanitarian crisis,” he warned.
The chances of Sri Lanka defaulting on loans and debts have never been high. However, when we dug up information about the finance department in the government and what the finance minister has to say about this, we found that they have a plan.
The plan is a new and strong relief package that will try to rebalance the economic imbalance. The debt can be looked at as a secondary objective but for now, the thing that they would like to focus on is the foundation of the economy. The employees, pensioners and differently-abled soldiers are the first-hand people who will get the benefits.
The finance minister, meanwhile, said Tuesday they have a plan in place. He said the new $1.2 billion (229 billion Sri Lankan rupees) economic relief package includes payment of a special monthly allowance of Rs 5,000 to 1.5 million government employees, pensioners and differently-abled soldiers from January 2022.
This is by far the response of the Sri Lankan government to the crisis that the nation is facing. Let us now look at some of the major factors on why and how the economy at Sri Lanka sunk this much, the first one is the tourism setback.
Reasons Behind the Economic Crisis in Sri Lanka
Tourism in Sri Lanka and turmoil
The impact of the pandemic was huge on Sri Lanka. Covid 19 has stopped any sort of travel and tourism in the country for a long time now. According to the reports of the world travel and tourism council, nearly 2 lakh people have lost jobs in the travel industry since the pandemic began and globalised.
The loss of foreign revenue is huge too. According to the Hindu report last year, forex reserves have dropped from $7.5 billion to $2.8 billion, which is a steep decline and is obviously not healthy at all. The loss of foreign revenue from the sector has been substantial.
Adding to the above-mentioned deficits, the Sri Lankan rupee is depreciating too. This is known as inflation and it is very high in Sri Lanka right now. Basic livelihood items such as food items’ prices have risen manifold and people have to face difficulties to meet both ends. The nation, for now, has to depend heavily on imports.
Food Shortage in Sri Lanka
Photos of Lines and queues of people can be seen all over the news from Sri Lanka. These are the lines of people who are in a queue to buy home essentials, like food items. Prices of such basic items have risen enormously and are out of reach for many. Prices of bread, rice, wheat, sugar etc., have all risen several times.
People standing in Queue in Sri Lanka
It has never been hard for poor and middle-class people to buy items like these. The daily wage earners especially are affected the most.
Quoting a man who works as a chauffeur in Colombo, The Guardian report said he has now taken up a second job and his family now eats two meals every day, and not three. He said his village grocer now makes ten 100g packets out of a 1kg milk powder packet because no one can afford to buy the full packet.
The pandemic has just more severely affected those in the nation. The government’s efforts to make Sri Lanka ‘100% organic’ is at a loss. Last year, The Hindu reported that the country is planning to cut the use of chemical fertilisers to almost zero. To which farmers opposed and replied that this will affect food production. Pandemic made the food situation of Sri Lanka more severe.
“The government has no money for fertiliser subsidies. Many of us farmers are reluctant to invest money because we don’t know if we will make any profit,” A farmer was quoted as saying.
At the time of crisis, everyone hopes high from the government and the people of Sri Lanka are hoping the same from the government there. Speaking at the parliament in December 2020, MP, Harsha de Silva said that the only solution to the crisis is to seek assistance from the IMF(International Monetary Fund). He said homegrown solutions would not help, and only the IMF can revive the country’s economy.
The president’s office did not have an official notice or announcement for the citizens and the central bank is appealing for the foreign currency. The government of Sri Lanka is hustling to make things better for the people but it is just too hard. They are trying to stabilise the situation and try to help poor and sick people first and apply that others have to sacrifice a little.
The central bank had earlier last year prohibited traders from trading more than 200 Sri Lankan rupees for a single US dollar, they also have stopped traders from entering into forwarding currency contracts. The government has since been taking temporary relief measures to ease the situation.
Early December, Finance Minister from Sri Lanka Basil Rajapaksa visited neighbour India and commenced talks with his Indian counterpart Nirmala Sitharaman and India’s External Affairs Minister S Jaishankar to which they were thinking to take forward.
Basil Rajapaksa with Nirmala Sitharaman
The talks included a total of $1.9 billion of assistance for the country and besides that, a $500 million credit line for fuel and $400 million swap was discussed too. Similar talks were also held with China and Bangladesh.
Of all the reliefs and grants, Rajapaksa, (The President) assured that the relief package would not contribute to further inflation and that there won’t be any new taxes.
India’s Relations with Sri Lanka and the Assistance
India has always been a healthy and supportive friend to its neighbours. One of the neighbours of the Indian subcontinent is Sri Lanka. Speaking of help and assistance from India, the news is flooded with nice gestures from the Indian government for the Sri Lankan government. Let us have a look:
India assured Sri Lanka of its support to ally over these “difficult times” even as it welcomed the Trincomalee tank farms project saying it will augment bilateral energy security.
External Affairs Ministry Spokesperson Arindam Bagchi, when asked at a media briefing on the possibility of India extending the credit line to help Sri Lanka overcome its economic crisis, said it has always stood by the people of that country.
It is a great hope to notice how countries are helping each other in such times. India has agreed to mostly increase the credit line and time for repayments for Sri Lanka. Decisions like these will help foster friendly relationships with neighbouring countries.
After a telephonic conversation with his Sri Lankan counterpart, External Affairs Minister S Jaishankar said India will support Sri Lanka in “these difficult times”. “Greeted FM G.L. Peiris of Sri Lanka in the New Year. A reliable friend, India will support Sri Lanka in these difficult times. Agreed to remain in close touch,” Jaishankar tweeted.
“We have seen reports that the Sri Lankan Cabinet has approved the development of the Trincomalee tank farms. Energy security is an important area of our bilateral cooperation with Sri Lanka,” he said supporting relations with the neighbour.
The Sri Lankan government replied that after analysing the three existing agreements with the Indian government about the strategic Trincomalee oil tank complex, usually known as the Trinco oil tank farm, the two countries have reached an agreement to implement a joint development project to make
On the query on extending the credit line time by India, Bagchi referred to the visit to New Delhi by Sri Lankan Finance Minister Basil Rajapaksa last month.
“He briefed the Indian side on the economic situation in Sri Lanka and his government’s approach in addressing these challenges. India has always stood by the Sri Lankan people and Sri Lanka is an important part of our neighbourhood first policy,” Bagchi said relying on support to the island.
The above dialogues and discussion proved that India was ready to help Sri Lanka. Therefore, after mutual agreements and deals that were beneficial for both the countries, India extended a relief fund of $1 billion to the present Sri Lankan government. This was a good move indeed and helped Lanka in its time of need. However, after the March relief extended by India, Sri Lanka is again seeking for an additional credit line of $1.5 billion on top of the earlier funds. This credit line will also be met by India, which will be used by Sri Lanka for the import of its essential goods like rice, flour, sugar, pulses, medicines and more, as far as the Reuters reports go.
The help, extended by India, will undoubtedly be beneficial for the economically devastated Lanka and will further help in bettering the relations between the countries. India always proves that it is very much ready to help out everyone and set an example of moral duties for onlookers.
It is not that the nation of Sri Lanka has found this issue very sudden, but that the country is experiencing it for quite some time now, which is more worrying. It has been two years since the pandemic started and globalised but the foreign reserves at Sri Lanka were depleting long back and it only shows some leniency. The tolerance of the Sri Lankan government can be detained in the present crisis as a reason for the same.
India, as a supporting country, has always been together with other countries who are in need. It plans to do the same this year too, even when the shadows of the pandemic are hovering above still and India itself needs support. It is time that every country follows the same rules and morals so that the world can be a happier place to live in. The pandemic has massively accelerated empathy in the world and whatever lies ahead, we can feel a sense of togetherness.
FAQs
Why is there an economic crisis in Sri Lanka?
The economic crisis that Sri Lanka is currently undergoing points to a severe depreciation of the country’s foreign exchange reserves. The crisis started back in 2019, when there was a massive dip in the country’s overall produce, which declined by 50%. Then the Covid19 pandemic struck, which made it insanely difficult for the country to recover, followed by a ban on import on March 2020. Now, the struggle of the country is real, with debts piling in and the government requesting relief funds from the other countries to import the essential goods.
How much does Sri Lanka owe the world?
The national debt of Sri Lanka is around $51 billion, as of March 2022.
Is Sri Lanka in an economic crisis?
Yes, Sri Lanka is facing its worst economic and debt crisis, which started in 2019 and is continuing even now!
