Sri Lanka declared default on its $51 billion foreign debt on Tuesday, as the island faces the worst economic crisis in its history and the president faces a wave of protests demanding his departure.
“Sri Lanka to suspend repayments for an interim period pending an orderly restructuring”the country’s Treasury Secretary Mahinda Siriwardena told reporters.
The Ministry of Finance clarified that this default concerned all external obligations, including loans granted by foreign governments, in anticipation of a bailout by the International Monetary Fund (IMF).
“The government is only taking this emergency measure as a last resort, in order to avoid a further deterioration in the financial situation of the republic”said a press release from the ministry.
Creditors are free to capitalize interest owed to them or opt for repayment in Sri Lankan rupees, he added.
Weeks of power cuts and severe shortages of food, fuel and pharmaceuticals have plunged many of the country’s 22 million people into misery as Sri Lanka faces its worst recession since independence in 1948.
The crisis, due to the Covid-19 pandemic which deprived the country of its tourist windfall, has been aggravated by a series of bad political decisions, according to economists.
The government imposed a broad ban on imports to preserve its foreign exchange reserves and use them to service the debt it has now paid.
Calls for resignation
People’s frustration with the government has spread widely, and long queues form every day across the island to buy scarce supplies of petrol, gas and kerosene.
On Sunday, Sri Lankan doctors warned they were nearly out of life-saving medicine, adding that the economic crisis was likely to claim more lives on the island than the coronavirus pandemic.
Several facilities have already suspended routine operations since last month because they ran out of anesthetics. The Sri Lanka Medical Association has pointed out that even emergency operations may not be possible soon.
Thousands of people camped outside President Gotabaya Rajapaksa’s office in the capital Colombo on Tuesday for the fourth straight day of protests calling for his resignation.
Last year, international rating agencies downgraded Sri Lanka’s rating, effectively preventing the country from accessing foreign capital markets to obtain the loans needed to finance imports of food, fuel and medicine.
Sri Lanka has requested debt relief from India and China. But these two countries preferred to offer him more lines of credit to buy basic products.
China and Japan each hold around 10% of Sri Lanka’s external debt, while India’s share is less than 5%.
The largest share, 47%, is market borrowing through international sovereign bonds and other similar instruments.
The default will not deter China from extending new loans to Sri Lanka, Foreign Ministry spokesman Zhao Lijian said in Beijing.
“China has always done its best to provide assistance for the economic and social development of Sri Lanka. We will continue to do so in the future.”he said.
Sri Lanka’s debt service for calendar year 2022 was estimated at just under $7 billion, on reserves of just $1.9 billion at the end of March.
The government is seeking an IMF bailout as the local currency has lost a third of its value over the past month.
Last week, Finance Ministry officials told AFP that the Sri Lankan government intended to offer its creditors a negotiated restructuring of its debt, in order to avoid “a hard payment default”.