Sri Lanka announces default on all external debt amid growing economic crisis

Creditors, including foreign governments that had lent to the South Asian nation, were free to capitalise any interest payments due to them from Tuesday afternoon or opt for payback in Lankan rupees.
Sri Lankans demanding president Gotabaya Rajapaksa resign over the debt-ridden country’s worst economic crisis protest in the rain outside the president's office in Colombo. (Photo | AP)
Sri Lankans demanding president Gotabaya Rajapaksa resign over the debt-ridden country’s worst economic crisis protest in the rain outside the president's office in Colombo. (Photo | AP)

COLOMBO: Faced with critically low forex reserves, Sri Lanka on Tuesday announced that the crisis-stricken country will default on its external debt pending a bailout package from the International Monetary Fund.

A statement from the finance ministry said, "it shall be the policy of the Sri Lankan government to suspend normal debt servicing, shall apply to amounts of affected debts outstanding on April 12, 2022".

The policy shall be in effect for all international bonds, all bilateral loans excluding swaps between the Central Bank and a foreign central bank, all loans with commercial banks and institutional lenders, it said.

The debt servicing suspension will be in force for an interim period pending an orderly and consensual restructuring consistent with the proposed arrangement with the IMF.

The government in January resisted calls for debt default in order to pay for its imports.

Since then, the economic crisis has been aggravated by a shortage of food, gas and electricity.

People carry out protests throughout the country blaming the government for its mishandling of the economic crisis caused by the forex crisis.

An analyst, who did not want to be named, said, "this is a unilateral debt suspension, not the outcome of negotiations with creditors or following consent solicitation".

Sri Lanka's external debt servicing obligations were thought to be over USD 6 billion.

In January, a USD 500 million sovereign bond payment was settled.

In July another one-billion-dollar payment becomes due.

WA Wijewardena, ex-deputy governor of the Central Bank, said the government was left with very low forex reserves and hence no available options.

Yet the policy to suspend debt servicing could be reversed after an agreement with the IMF.

Sri Lanka is facing its worst economic crisis since gaining independence from the UK in 1948.

People have been protesting for weeks over lengthy power cuts and shortage of fuel, food and other daily essentials.

They are demanding the resignation of the president.

President Gotabaya Rajapaksa has defended his government's actions, saying the foreign exchange crisis was not his making and the economic downturn was largely pandemic driven by the island nation's tourism revenue and inward remittances waning.

Menwhile, ahead of the new year celebrations in Sri Lanka, 11,000 MT of rice from India reached Colombo on Tuesday.

According to the Indian embassy in Sri Lanka, the rice reached Colombo on board the ship Chen Glory.

The New year in Sri Lanka is generally celebrated on April 13 or April 14 and traditionally begins at the sighting of the new moon.

Over 16,000 MT of rice has been supplied by India under its multi-pronged support to Sri Lanka in the past week alone, said the embassy, adding that the supplies mark the special bond between India and the island nation.

Notably, amid the economic crisis in Sri Lanka, India has stepped forward to help the country by supplying fuel, vegetables, daily ration items and medicines.

India has already supplied over 270,000 MT of fuel to Sri Lanka till now and has earlier announced another USD 1 billion as a credit to help shore up the sinking economy of the island nation.

The USD 1 billion Line of Credit to Colombo will help in keeping their food prices and fuel costs under check.

Since January this year, support from India to Sri Lanka has exceeded USD 2.5 billion. In February, New Delhi provided a short-term loan of USD 500 million to Colombo for the purchase of petroleum products through the Ministry of Energy and the Ceylon Petroleum Corporation on behalf of the Government of Sri Lanka. In November 2021, India had given 100 tonnes of nano nitrogen liquid fertilizers to Sri Lanka as their government stopped the import of chemical fertilizers.

Besides, the Reserve Bank of India has extended a currency swap of USD 400 million and deferred payments owed by the Central Bank of Sri Lanka under the Asian Clearance Union worth several hundred million dollars.

Sri Lanka is battling a severe economic crisis with food and fuel scarcity affecting a large number of the people in the island nation. The economy has been in a free-fall since the onset of the COVID-19 pandemic, leading to the crush of tourism.

Sri Lanka is also facing a foreign exchange shortage, which has, incidentally, affected its capacity to import food and fuel, leading to the power cuts in the country. The shortage of essential goods forced Sri Lanka to seek assistance from friendly countries.

(With ANI Inputs)

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