A man waved the Sri Lankan national flag at the barricades blocking the entrance to the presidential office during a protest in Colombo
Highlight
- Sri Lanka’s foreign debt servicing obligations were assumed to exceed USD 6 billion
- In January, sovereign bond payments of USD 500 million were settled.
- In July, another billion dollars in payments become due.
Facing severely low forex reserves, Sri Lanka on Tuesday announced that the beleaguered country would default on its external debt pending a bailout package from the International Monetary Fund. “It will be the policy of the Government of Sri Lanka to suspend the normal debt service …..applicable to the amount of affected loans outstanding as on April 12, 2022”, said a statement from the Ministry of Finance.
This policy will be effective for all international bonds, all bilateral loans except swaps between a central bank and a foreign central bank, all loans with commercial banks and institutional lenders.
Debt service suspension will be in force for the interim period pending a systematic and agreed restructuring in line with the proposed arrangement with the IMF.
In January the government resisted calls for loan defaults to pay for its imports.
Since then, the economic crisis has been exacerbated by shortages of food, gas and electricity. People hold protests across the country, blaming the government for its handling of the economic crisis caused by the foreign exchange crisis.
An analyst, who did not wish to be named, said “this is a unilateral debt suspension, not the result of negotiations with creditors or after soliciting consent”.
Sri Lanka’s foreign debt servicing obligations were assumed to exceed USD 6 billion.
In January, a sovereign bond payment of USD 500 million was settled. Another billion dollars of payments become outstanding in July.
WA Wijewardene, former deputy governor of the central bank, said the government has very little foreign exchange reserves and hence no option is available.
Yet the policy of suspending debt service can be reversed following an agreement with the IMF.
Sri Lanka is facing its worst economic crisis since gaining independence from Britain in 1948.
People have been protesting for weeks over prolonged power cuts and lack of fuel, food and other daily essentials. They are demanding the resignation of the Speaker.
President Gotabaya Rajapaksa has defended his government’s actions, saying the foreign exchange crisis was not his creation and that the economic slowdown was a pandemic driven largely by the island nation’s tourism revenue and inward remittances.