Sri Lanka defaults on entire US$51b external debt

[COLOMBO] Crisis-stricken Sri Lanka defaulted on its US$51 billion external debt on Tuesday, calling the move a “last resort” after running out of foreign exchange to import desperately needed goods. 

The island nation is grappling with its worst economic downturn since independence, with regular blackouts and acute shortages of food and fuel. 

Sri Lanka’s finance ministry said in a statement that creditors, including foreign governments, were free to capitalise any interest payments due to them from Tuesday or opt for payback in Sri Lankan rupees. 

“The government is taking the emergency measure only as a last resort in order to prevent further deterioration of the republic’s financial position,” the statement said. 

It added that the immediate debt default was to ensure “fair and equitable treatment of all creditors” ahead of an International Monetary Fund assisted recovery programme for the South Asian nation. 

Sri Lanka's dollar bonds due July 2022 fell 1.8 cents on the dollar on Tuesday to a record low 46.07 cents. The rupee lost 0.5 per cent.

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The announcement could increase pressure on President Gotabaya Rajapaksa and his brother, Prime Minister Mahinda Rajapaksa, to step down.

They have so far been defiant despite mounting citizen protests against inflation that's running at 20 per cent and daily electricity shortages of as long as 13 hours.

Rajapaksa's party has lost its majority in Parliament and bailout talks with the International Monetary Fund are set to be further delayed. The government will expedite talks with the IMF, the finance ministry said Tuesday, adding that it wants to avoid a hard default.

"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."

Sri Lanka's foreign-exchange reserves slumped 16 per cent to US$1.94 billion last month. The government is due to make a US$36 million interest payment on a 2023 dollar bond April 18, as well as US$42.2 million on a 2028 note, Bloomberg-compiled data show.

A US$1 billion sovereign bond was maturing July 25.

The economic crisis has evolved into a political stalemate, potentially complicating efforts to negotiate aid.

Mahinda Rajapaksa in a speech Monday night called on citizens to be patient as price surges and shortages worsen, while touting his family's role in ending a decades-long civil war back in 2009. His brother, the president, has said he won't resign under any circumstances. AFP, BLOOMBERG