Home Gas effect Sri Lanka announces default after facing extremely low foreign exchange reserves

Sri Lanka announces default after facing extremely low foreign exchange reserves


Faced with extremely low foreign exchange reserves, Sri Lanka announced on Tuesday that the crisis-hit country would default on its foreign debt pending a bailout from the International Monetary Fund.

A statement from the Ministry of Finance said: “It will be the policy of the Sri Lankan government to suspend normal debt servicing…..will apply to amounts of affected debt outstanding on 12 April 2022.”

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

The debt service suspension will be in effect for an interim period pending an orderly and consensual restructuring consistent with the proposed arrangement with the IMF.

READ ALSO: Members of Sri Lanka’s ruling coalition propose caretaker government and new prime minister

In January, the government resisted calls for default in order to pay for its imports.

Since then, the economic crisis has been aggravated by a shortage of food, gas and electricity. People are staging protests across the country, accusing the government of its mishandling of the economic crisis caused by the forex crisis.

An analyst, who did not wish to be named, said: “This is a unilateral suspension of debt, not the result of negotiations with creditors or following a solicitation of consent.”

Sri Lanka’s external debt service obligations were estimated at over US$6 billion.

In January, a $500 million sovereign bond payment was settled. In July, another payment of $1 billion becomes due.

READ ALSO: China’s debt trap diplomacy in the region and its impact on India

WA Wijewardena, former Deputy Governor of the Central Bank, said the government was left with very low foreign exchange reserves and therefore no options available.

However, the policy of suspension of debt service could be reversed after an agreement with the IMF.

Sri Lanka is facing its worst economic crisis since its independence from the United Kingdom in 1948.

People have been protesting for weeks over long power cuts and shortages of fuel, food and other basic necessities. They demand the resignation of the president.

President Gotabaya Rajapaksa has defended his government’s actions, saying the currency crisis was not his fault and that the economic slowdown was largely due to the pandemic due to the island nation’s tourism revenue and dwindling incoming remittances.