Sri Lanka to suspend foreign debt payments

Colombo has taken the step as foreign reserves needed to pay for imports of essentials like medicines and food dwindle.

Mahinda Rajapaksa
Prime Minister Mahinda Rajapaksa (pictured) has so fare refused to resign [File: Bloomberg]

Sri Lanka will temporarily suspend foreign debt payments to avoid a hard default, the governor of its central bank has said, pointing to the country’s limited foreign reserves that it needs to keep for imports of essentials such as fuel.

“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,” Governor P Nandalal Weerasinghe told reporters on Tuesday.

Sri Lanka is due to start talks with the International Monetary Fund (IMF) on a loan programme next week, with the country suffering from prolonged power cuts alongside shortages of food and medicines.

The island nation’s foreign reserves stood at a paltry $1.93bn at the end of March, with foreign debt payments of about $4bn due this year, including a $1bn international sovereign bond maturing in July.

The announcement follows mounting calls for President Gotabaya Rajapaksa and his brother, Prime Minister Mahinda Rajapaksa, to resign. They have so far been defiant despite citizen protests against inflation that’s running at 20 percent and daily electricity cuts of as long as 13 hours. Rajapaksa’s party has lost its majority in parliament.

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The governor said the action was being taken in good faith, emphasising that the country of 22 million people had never defaulted on its debt payments.

“This will be on a temporary basis until we come to an agreement with creditors and with the support of a programme with the IMF,” said Weerasinghe, who took office last week amid growing public unrest triggered by the economic crisis.

“We need to focus on essential imports and not have to worry about servicing external debt,” he said.

JP Morgan analysts estimate Sri Lanka’s gross debt servicing would amount to $7bn in 2022 and a current account deficit of approximately $3bn.

“The market was expecting this default to come,” said Carl Wong, head of fixed income at Avenue Asset Management, which no longer holds Sri Lankan bonds. “Now we have to see how the new government handles the onshore chaos while talking to IMF.”

Rajapaksa’s administration is also seeking aid from nations including India and China, which is one of its biggest creditors.

“China has been doing its utmost to provide assistance to the socioeconomic development of Sri Lanka, and will continue to do so going forward,” a Foreign Ministry representative said at a briefing Tuesday.

Source: News Agencies