Sri Lanka defaulted on external debt amid crisis

A Buddhist monk takes part in a demonstration against the economic crisis in Sri Lanka, April 11, 2022, in front of the presidential palace in Colombo. (Ishara S. KODIKARA/AFP/Archives)

Sri Lanka defaulted on its $51 billion foreign debt on Tuesday as its president faced fierce popular protests over the worst economic crisis in the island’s history.

“We are no longer able to repay the external debt,” Central Bank Governor Nandalal Weerasinghe told reporters. “This is a preventive and consensual default. We have announced this to creditors,” he added.

The Treasury Department explained that this default applies to all external liabilities, including loans provided by foreign governments, pending a bailout from the International Monetary Fund (IMF), from which Colombo hopes to receive support of about $3 billion over three years.

“The government is taking this emergency measure only as a last resort to avoid further deterioration of the country’s financial situation,” the ministry said in a press release.

“Sri Lanka will suspend payments for an interim period pending an orderly restructuring,” Finance Minister Mahinda Sirivardena told reporters.

He added that lenders can capitalize on the interest they are owed or choose to pay in Sri Lankan rupees.

a lack of

Weeks of blackouts and severe shortages of food, fuel and medical supplies have plunged many of the country’s 22 million people into poverty as Sri Lanka suffers its worst recession since independence in 1948.

Main economic indicators of Sri Lanka
Sri Lanka Economic Key Indicators (Janis LATVELS/AFP)

Economists say the crisis caused by the Covid-19 pandemic, which robbed the country of a windfall in tourism, was exacerbated by a series of bad policy decisions.

The government imposed a sweeping ban on imports to preserve its foreign exchange reserves and use them to service the debt.

This month, people’s dissatisfaction with the government has become widespread, with long lines lining up on the island every day to buy meager supplies of gasoline, gas and kerosene.

On Sunday, Sri Lankan doctors warned they were nearly out of life-saving medicines, adding that the economic crisis was likely to claim more lives on the island than the coronavirus pandemic.

Several facilities have already suspended routine operations since last month because they ran out of anesthetics. The Medical Association has indicated that soon even emergency surgeries may become impossible.

Calls for resignation

The measures announced by the government and the resignation on Sunday evening of most members of the government have not yet been able to calm popular anger.

On Tuesday, thousands of people camped outside the office of President Gotabay Rajapaksa in Colombo for the fourth day of protests calling for his resignation.

Last year, international rating agencies downgraded Sri Lanka, effectively depriving the country of access to foreign capital markets to obtain loans needed to finance imports of food, fuel and medicines.

Motorcyclists line up to refuel on April 12, 2022 in the capital city of Colombo.
Motorcyclists line up to refuel on April 12, 2022 in the capital city of Colombo. (Ishara S. KODIKARA/AFP)

Sri Lanka has requested debt relief from India and China. But the two countries preferred to offer him more credit lines to buy basic products.

China and Japan each hold approximately 10% of Sri Lanka’s external debt, while India’s share is less than 5%.

The largest share, 47%, falls on market borrowings through international sovereign bonds and other similar instruments.

A default will not deter China from extending new loans to Sri Lanka, Foreign Ministry spokesman Zhao Lijian said in Beijing.

“China has always done its best to assist the economic and social development of Sri Lanka. We will continue to do so,” he said.

Sri Lanka’s debt service for calendar year 2022 was estimated at just under $7 billion, with reserves of just $1.9 billion at the end of March.

The government is seeking IMF assistance as the local currency has lost a third of its value over the past month.

Treasury officials told AFP last week that the government intends to offer its creditors a negotiated restructuring of its debt to avoid a “serious default.”

Leave a Comment