Sri Lanka announces default on $51 billion External debt.
The Sri Lankan government has temporarily delayed the payment of its international loans due to the country’s economic turmoil. The Island was warned of an unprecedented default, and prices on foreign debt were delayed, an exceptional move to protect its shrinking dollar stockpile for critical food and fuel imports.
The government has indicated that it will default on its $51 billion foreign debt until a rescue from the International Monetary Fund, according to an interim policy established by the Finance Ministry on the service of the country’s external public debt (IMF).
On Tuesday, the finance ministry stated that all pending payments to bondholders, bilateral creditors, and institutional lenders would be halted until the debt is restructured. Nandalal Weerasinghe, the recently appointed central bank governor, stated in a press conference that officials are attempting to negotiate with creditors while also warning of a possible default.
According to the Sri Lanka Finance Ministry, the restriction would apply to all foreign bonds, bilateral loans, and loans with commercial banks and institutional lenders. While India has pledged over $2.5 billion in help to Sri Lanka, which has resulted in a regular supply of fuel, food, and medicines, Beijing has yet to respond to Colombo’s request for $2.5 billion in aid and debt restructuring. Despite seeming to approve Pakistan’s request to roll over $4.2 billion in debt payments, China did not offer Sri Lanka a formal guarantee.
According to the finance minister, the restrictions are a “last resort” to avoid worsening the Republic’s financial situation. “Any additional delay risks permanently harming Sri Lanka’s economy and generating potentially irreparable detriment to the holders of the country’s foreign public loans,” says the report.
President Gotabaya Rajapaksa and his brother, Prime Minister Mahinda Rajapaksa, have been under increasing pressure to resign. Despite demonstrations of about 20 per cent inflation and daily electricity shortages of up to 13 hours, they have remained stubborn so far — Gotabaya called for “unity and greater understanding” on Tuesday while greeting residents for the Sinhala and Tamil New Year holidays. His party has lost its parliamentary majority, and bailout discussions with the International Monetary Fund are expected to be postponed even more.
According to the finance ministry, the administration intends to speed up discussions with the IMF to avoid a harsh default. Rajapaksa’s government is also requesting assistance from countries such as India and China, one of the country’s largest creditors.
What does the Sri Lankan government say?
Former Prime Minister Ranil Wickremesinghe warned the Sri Lankan government’s interim suspension of payment of all foreign loans would put further strain on the country’s banking system.
“Sri Lanka is unable to make a USD 200 million debt repayment next week,” Wickremesinghe stated in a speech to the country on the eve of the Sinhala and Tamil New Years. The government has halted all foreign loan repayments. This situation will put even more strain on the country’s financial system.”
“This decision is the government’s declaration that the nation is insolvent. “It is now up to the next Finance Minister to fly to Washington and meet with the IMF to explain the current situation,” he continued.
“By mid-May, the Indian Line of Credit would be drained,” the former PM remarked, demanding that the administration accept responsibility for the country’s insolvency. Due to a scarcity of foreign currency, private firms will not function by June. This administration must take full responsibility for the country’s bankruptcy.
He went on to say that the administration now has no choice but to engage with other political parties without restrictions. “We, the Opposition, apologized to the people last week in Parliament for failing them.” On the other hand, elections or constitutional reforms would not fix the country’s issue,” he remarked.
After consultations with the government and formulating a plan, conditions may be put down. He went on to say that it is our job to give everyone a fair hearing.
Wickremesinghe also urged the government to follow Lebanon’s lead. “The IMF deal with Lebanon was contingent on its introduction in Parliament for approval. This must also occur in Sri Lanka. We’re in a precarious position. He said, “We will conclude the year as a bankrupt nation.”
“However, we can develop a solution to this dilemma, and for this, a national effort will be required. We shall go through a difficult phase, but we must persevere. This crisis can be addressed, and our economy can be strengthened. But our country can only achieve this if we collaborate and stick to a strategy,” he continued.
How did the island country end up where it is now?
Since 2005, the Sri Lankan government has taken out large loans from Beijing for infrastructure projects, many of which have turned into white elephants.
By January 2015, China owed Sri Lanka a significant portion of its foreign debt. Sri Lanka chose in 2017 to sell a controlling part in the port to a Chinese firm named the China Merchants Port Holdings Company to settle the debt.
Another ‘white elephant’ seems to be the Mattala Rajapaksa International Airport, which is dubbed the “world’s emptiest international airport” by Nicholas Assef, founder of LCC Asia Pacific, and has failed to stimulate commerce and tourism.
President Gotabaya Rajapaksa announced a 10-year transition to 100% organic farming in Sri Lanka, which dealt another blow to the country’s diminishing finances. What was expected to be a gradual transition became a shock when he declared in April 2021 that chemical fertilizers and agrochemicals would be entirely outlawed in the nation beginning the following month.
After the coronavirus, outbreak sabotaged necessary tourist and remittance money, the economic crisis spread. The government enacted a broad import embargo to save depleting foreign currency reserves and utilize them to settle the obligations it had already defaulted.
How much debt does Sri Lanka have now?
Market borrowings via foreign sovereign bonds account for little under half of Sri Lanka’s debt, including a $1 billion bond that was due to mature on July 25. On Monday, a $78 million coupon payment is due across two of its bonds due in 2023 and 2028, albeit there is a 30-day grace period.
According to estimates, Sri Lanka would require $7 billion to pay its debt this year while having just $1.9 billion in reserves at the end of March.
Friends of Sri Lanka
In the last three months, India has provided Sri Lanka with nearly USD 2.5 billion in aid, including loans for petrol and food. “Over 270,000 metric tons of fuel and gasoline have been transported to Sri Lanka since mid-March.
In addition, the newly extended USD 1 billion credit facility has provided roughly 40,000 tonnes of rice, “Arindam Bagchi, a spokesperson for the Ministry of External Affairs, stated during a press conference.
“We have already expressed to them our willingness to provide whatever assistance we can, and as seen by our actions so far, we will continue to do so.” “He said
On April 12, a supply of 11,000 MT of rice from India landed in Sri Lanka to assist Sri Lankans in celebrating the customary national New Year despite the country’s economic turmoil.
In addition, RBI has extended a $400 million currency swap and several hundred million dollars in postponed payments, payable by the Central Bank of Sri Lanka under the Asian Clearance Union.