Crisis-hit Sri Lanka announces debt default, temporarily suspends foreign dues

Crisis-hit Sri Lanka, on Tuesday, announced that it is facing critically low forex reserves and therefore will default on its external debt pending a bailout package from the International Monetary Fund.

In a statement, the finance ministry said, "It shall be the policy of the Sri Lankan government to suspend normal debt servicing. Shall apply to amounts of affected debts outstanding on April 12, 2022."

The statement further said that the policy shall be in effect for all international bonds, all bilateral loans excluding swaps between the Central Bank and a foreign central bank, and all loans with commercial banks and institutional lenders. 

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The debt servicing suspension will be in force for an interim period pending an orderly and consensual restructuring consistent with the proposed arrangement with the IMF. The government in January resisted calls for debt default to pay for its imports.

Since then, the economic crisis has been aggravated by a shortage of food, gas, and electricity. People carry out protests throughout the country blaming the government for its mishandling of the economic crisis caused by the forex crisis.

Sri Lanka's external debt servicing obligations were thought to be over USD 6 billion. In January, a USD 500 million sovereign bond payment was settled. In July another one-billion-dollar payment becomes due.

WA Wijewardena, ex-deputy governor of the Central Bank, said the government was left with very low forex reserves and hence no available options.

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Yet the policy to suspend debt servicing could be reversed after an agreement with the IMF. Sri Lanka is facing its worst economic crisis since gaining independence from the UK in 1948.

People have been protesting for weeks over lengthy power cuts and a shortage of fuel, food, and other daily essentials. They are demanding the resignation of the president.

President Gotabaya Rajapaksa has defended his government's actions, saying the foreign exchange crisis was not his making and the economic downturn was largely pandemic driven by the island nation's tourism revenue and inward remittances waning.