Sri Lanka officially defaults on its debt, for first time in history

Sri Lanka’s government announced in mid-April it would stop paying back its foreign debt to preserve cash for food and fuel imports as it struggled with a dollar crunch that’s led officials to implement capital controls and import curbs

FPJ Web DeskUpdated: Thursday, May 19, 2022, 04:02 PM IST
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Sri Lanka has run out of money to pay for food, fuel, medicines and other daily needs | AFP

Sri Lanka has defaulted on its debt for the first time in its history as the country struggles with its worst financial crisis in more than 70 years.

It comes after a 30 day grace period to repay $78m of unpaid debt interest payments expired on Wednesday. The governor of Sri Lanka's central bank said the country was now in a "pre-emptive default".

Policy makers had flagged to creditors that the nation wouldn’t be able to make payments until the debt is restructured, and is therefore in pre-emptive default, central bank Governor Nandalal Weerasinghe said at a briefing Thursday.

Sri Lanka’s government announced in mid-April it would stop paying back its foreign debt to preserve cash for food and fuel imports as it struggled with a dollar crunch that’s led officials to implement capital controls and import curbs.

A few days later, it failed to service a $78 million coupon on its dollar bonds due in 2023 and 2028, leading S&P Global Ratings to declare a selective default.

Sri Lanka currently does not have a fully functioning government after President Gotabaya Rajapaksa’s cabinet resigned last week. Sri Lankans are suffering severe shortages of fuel, food and medicine, with multi-hour power cuts and queues for petrol and diesel. A protest movement has called on Rajapaksa to step down.

Sri Lanka is in talks with the International Monetary Fund for a bailout and needs to negotiate a debt restructuring with creditors. The country has previously said it needs between $3 billion and $4 billion this year to pull itself out of crisis.

The nation of 22 million people is battling a devastating economic crisis as tax cuts by President Gotabaya Rajapaksa drained government coffers, COVID-19 hit the important tourism industry and rising oil prices emptied foreign exchange reserves.

Inflation hit 29.8 percent in April with food prices expanding by 46.6 percent year on year.

On a more positive note, US investment bank JPMorgan backed Sri Lanka’s crisis-hit government bonds on Wednesday, saying recent political changes should gradually improve its strains and help its talks with the International Monetary Fund.

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