As the island nation grapples with its worst economic crisis in memory and escalating protests demanding the government’s resignation, Sri Lanka announced a default on its $51 billion foreign debt on Tuesday.
Acute food and fuel shortages, as well as long daily power outages, have wreaked havoc on the country’s 22 million people, resulting in the country’s most painful downturn since independence in 1948.
The government has struggled to service foreign debts, and Tuesday’s decision comes ahead of talks with the International Monetary Fund (IMF) to avoid a more catastrophic hard default, in which Sri Lanka would completely default on its obligations.
“We have lost our ability to repay foreign debt,” Nandalal Weerasinghe, the Governor of Sri Lanka’s Central Bank, told reporters in Colombo.
“This is a negotiated pre-emptive default. We’ve informed the creditors about it.”
After months of scarcity, officials say the move will free up foreign currency to finance desperately needed food, fuel, and medicine imports.
Market borrowings through international sovereign bonds account for just under half of Sri Lanka’s debt, including a $1 billion bond that was due to mature on July 25.
China is Sri Lanka’s largest bilateral lender, holding about 10% of the island’s foreign debt. Japan and India are the next two largest bilateral lenders.
Since 2005, the government has taken out large loans from Beijing for infrastructure projects, many of which have turned into white elephants.
In 2017, Sri Lanka leased its strategic Hambantota port to a Chinese company after it was unable to service a $1.4 billion debt owed to Beijing for its construction.
Western countries and India’s neighbour, Pakistan, were concerned that the strategically located South Asian nation was falling into a debt trap.
Zhao Lijian, a spokeswoman for China’s foreign ministry, said Tuesday’s failure would not prevent Beijing from extending aid to Sri Lanka’s troubled economy.
“China has always aided Sri Lanka’s economic and social development to the best of its ability. We will do so in the future, as well “he stated
‘I’m afraid about the future.’
After the coronavirus outbreak sabotaged key tourism and remittance money, Sri Lanka’s spiralling economic crisis became apparent.
To conserve depleting foreign currency reserves and utilise them to service the obligations it has now defaulted on, the government enacted a broad import embargo.
However, the shortages that have resulted have inflamed popular outrage. Since March 20, at least eight individuals have died while waiting in fuel lines, with two of the deaths occurring on Monday.
At an anti-government march in Colombo on Monday, protester Vasi Samudra Devi told AFP, “It’s been disheartening to be so afraid of the future and where it’s headed.”
“There are folks who are already experiencing… We’ve all come together since we’re all touched by the economic downturn.”
Security personnel used tear gas and rubber bullets to disperse demonstrators who attempted to raid the houses of government figures.
On the fourth day of protests asking for President Gotabaya Rajapaksa’s resignation, thousands of people tented outside his oceanfront office in Colombo.
Government mismanagement, years of accumulated debt, and ill-advised tax cuts, according to economists, have exacerbated the issue.
Sri Lanka was also downgraded by international rating agencies last year, thus preventing the country from accessing foreign capital markets to raise new loans.
‘As a last resort,’
The default on Tuesday, according to Sri Lanka’s finance ministry, was “the final resort in order to avert further worsening of the republic’s financial status.”
Creditors had the option of capitalising any interest payments due to them or opting for repayment in Sri Lankan rupees, according to the ministry.
Finance Minister Ali Sabry told parliament on Friday that the government is requesting roughly $3 billion in IMF assistance over the next three years to help rebuild the economy.
Last week, government officials told AFP that the administration was working on a plan to allow sovereign bondholders and other creditors to accept a haircut in order to avoid a hard default.
Sri Lanka had asked India and China for debt relief this year, but both countries instead offered greater credit lines to purchase goods from them.
According to estimates, Sri Lanka will need $7 billion to service its debt this year, while having only $1.9 billion in reserves at the end of March.
