Crisis-stricken Sri Lanka Tuesday announced it would default on its $51 billion external debt pending a bailout from the International Monetary Fund.
The finance ministry said 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 Sri Lankan rupees.
Officials earlier said the island nation - living through its worst economic crisis in decades - would temporarily suspend foreign debt payments to avoid a hard default and conserve its limited foreign reserves for the import of essential items like food, fuel, and medicine.
"It has come to a point that making debt payments are challenging and impossible. The best action that can be taken is to restructure debt and avoid a hard default," Sri Lanka's central bank governor P Nandalal Weerasinghe told reporters.
Sri Lanka's foreign exchange reserves dropped 16.1 per cent to $1.93 billion in March from a month earlier, the central bank said last week.
An estimated $8.6 billion in debt payments fall due this year, according to an analysis by Bloomberg, and rapidly falling reserves raise questions about Sri Lanka's ability to pay even a part of this sum.
Since 2010, Sri Lanka has witnessed a sharp rise in foreign debt, reaching 88% of the country's GDP in 2019. The onset of the COVID-19 pandemic-induced global recession accelerated the crisis and by 2021, the foreign debt rose to 101% of the nation's GDP, causing an economic crisis.
The incumbent Government of Sri Lanka under president Gotabaya Rajapaksa made continuous cascading policy errors which resulted in a severe economic crisis for Sri Lanka.
These included significant tax cuts that affected fiscal policies and reduced government revenue, intensifying the budget deficit as well as the inflation.
To cover government spending, the Central Bank began printing money in record amounts, ignoring advice by the International Monetary Fund (IMF) to stop printing money and instead increase interest rates and taxes while decreasing spending, as well as another IMF warning that continued money printing would lead to an economic implosion.