Sri Lanka’s central bank denies risk of default

Sri Lanka is facing its worst financial crisis in decades, and foreign exchange reserves have fallen to $2.36bn.

Shoppers and pedestrians walk past auto-rickshaw on a shopping street in Colombo, Sri Lanka
Sri Lanka's finances have nosedived since the pandemic [File: Atul Loke/Bloomberg]

Sri Lanka’s central bank has said that the country is committed to honouring all forthcoming debt obligations, and that the island nation is not on the verge of a sovereign default.

Sri Lanka is facing its worst financial crisis in decades, and foreign exchange reserves have fallen to $2.36bn, according to Central Bank of Sri Lanka (CBSL) data.

“The government and the CBSL are committed to honour all forthcoming debt obligations,” the central bank said in a press release on Wednesday.

“The attention of the CBSL has been drawn to certain recent media reports which have claimed that Sri Lanka is at the verge of a sovereign default,” it added. “The CBSL wishes to state that such claims are totally unsubstantiated.”

The CBSL has taken necessary measures to secure alternative foreign exchange inflows through bilateral and multilateral funding arrangements with a plan to settle upcoming debt obligations, it said.

Sri Lanka has total outstanding sovereign bonds amounting to $12.55bn, with $1bn of the bonds maturing in July 2022.

“With the realisation of expected forex inflows and the resulting build-up of international reserves, the need for initiating discussions with investors on debt restructuring… does not arise,” the central bank said.

Citi Research on Monday said that confidence in the Sri Lankan government’s external repayment position remains weak and foreign exchange reserves were declining faster than expected.

“We stick to our base-case scenario that international bonds will need to be restructured by July,” Citi Research said.

Sri Lanka has been scouring for funds to prop up its reserves and repay debt amid ballooning import bills. The country’s finances have nosedived since the pandemic, with its key foreign exchange earners of tourism and remittances hit. The nation’s leaders have sought to balance ties between the major powers to get funds, while resisting a bailout from the International Monetary Fund.

India in January extended a $400m swap line to Sri Lanka and deferred an Asian Clearing Union settlement of $500m. Sri Lanka’s larger neighbour also last month offered a new line of credit of $500m for the purchase of petroleum products.

President Gotabaya Rajapaksa on January 9 requested from visiting Chinese Foreign Minister Wang Yi for Beijing to consider restructuring the South Asian island nation’s debt repayments.

Sri Lanka is also roping in lenders to finance fuel imports as the island nation looks for ways to ease an electricity generation crisis and cushion the strain on finances at a time when Colombo has to pay for essentials such as milk powder, sugar and wheat.

Source: News Agencies