Sri Lanka’s finance ministry has suspended payments on its government bonds, breaking what it called its “flawless record for servicing foreign debt since independence in 1948” amid the deepening economic and currency crisis.
In a statement Tuesday, the ministry said keeping payments “has become impossible”, adding that “although the government has taken extraordinary steps in an effort to stay within its entire foreign debt, it is now clear that it is no longer a sustainable policy. ”. He described the shutdown as a “last resort”.
“A complete restructuring of these obligations is needed,” the ministry said, adding that it had turned to the IMF for help in drawing up a recovery plan and financial assistance. Meetings with the IMF are set to begin this month.
Confirmation that Sri Lanka is unable to service its debt has lowered their prices from already lower levels, leaving a $ 1 billion bond maturing on July 25 just below face value at a record low of less than 47 cents a dollar. Longer-term bonds are traded at even lower prices, suggesting that investors believe the default is largely at a price.
The country has a total of about $ 35 billion in outstanding government external debt, with $ 7 billion in payments due this year. The IMF said last month that Sri Lanka’s public debt was at “unsustainable levels”.
The finance ministry has advised creditors that they can calculate Sri Lanka’s missed payments after Tuesday and add interest on a possible payment. He has engaged in “good faith discussions” with other countries that have given him money, the largest of which is China, as well as with trade creditors.
Sri Lanka’s foreign reserves fell to below $ 2 billion in March, and a shortage of dollars significantly reduced imports, leading to a shortage of vital goods such as fuel. The Sri Lankan rupee fell more than 37% against the dollar this year, making it the worst performing currency in the world.
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Colombo was embroiled in a political crisis this month after widespread protests against the government sparked a series of resignations, including the central bank governor and a number of cabinet members.
Protesters have accused the government of President Gotabaya Rajapaksa of mismanaging Sri Lanka’s economy and causing the crisis. The finance ministry said the blow to Covid-19 tourism and the rise in commodity prices caused by the crisis in Ukraine had “eroded Sri Lanka’s fiscal position”.
Sri Lankans are suffering from rising inflation, a 13-hour power outage and a shortage of basic goods. But Prime Minister Mahinda Rajapaksa, the president’s brother and former president himself, punished protesters in a speech Monday, days after security forces fired tear gas and water cannons at hundreds of protesters outside the president’s residence.
“Friends, every second you protest in the streets, our country loses opportunities to receive potential dollars,” he said.
The finance ministry’s statement comes after the newly appointed governor of Sri Lanka’s central bank surprised markets with a 7 percentage point rise in the country’s key interest rate on Friday in a bid to curb inflation, a move initially hailed by analysts as an attempt to restore confidence. although some have warned that the move is not enough to allay fears of potential default.
Sri Lanka has been a regular visitor to the debt markets since issuing its first international bond more than a decade ago, becoming Asia’s largest high-yielding borrower as it seeks to finance the country’s reconstruction after the 2009 civil war. The country currently has 12 dollar – denominated bonds worth $ 12.7 billion.
The Sri Lankan government has never been in arrears, surprising many investors with its willingness to keep interest payments after the pandemic that devastated the island’s major tourism industry.
The aftermath of Russia’s invasion of Ukraine, which sparked a spike in oil prices, has added to the pain of the energy import economy.
In addition to the pressure, Sri Lanka is relying on tourists from Russia and Ukraine, as traffic from India and Western Europe has been disrupted by Covid’s travel restrictions. Russia is also a key market for the island nation’s tea.
“They have lasted longer than expected, but this latest crisis has effectively ensured that there needs to be restructuring,” said Kevin Daly, Abrdn’s emerging market fund manager.
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