Sri Lanka yesterday warned of an unprecedented default and halted payments on foreign debt, an extraordinary step taken to preserve its dwindling US dollar stockpile for essential food and fuel imports.
All outstanding payments to bond holders, bilateral creditors and institutional lenders would be suspended until a debt restructure, the Sri Lankan Ministry of Finance said in a statement.
The newly appointed central bank governor, Nandalal Weerasinghe, said in a briefing that authorities are seeking to negotiate with creditors and warning of a possible default.
Photo: Reuters
The measures are “a last resort in order to prevent a further deterioration of the republic’s financial position,” the ministry said. “It is now apparent that any further delay risks inflicting permanent damage on Sri Lanka’s economy and causing potentially irreversible prejudice to the holders of the country’s external public debts.”
The announcement follows mounting calls for Sri Lankan President Gotabaya Rajapaksa and his brother, Sri Lankan Prime Minister Mahinda Rajapaksa, to resign. They have so far been defiant, despite citizen protests against inflation that is running at 20 percent and daily electricity cuts of as long as 13 hours.
Rajapaksa’s party has lost its majority in parliament and bailout talks with the IMF are set to be further delayed.
The government would expedite talks with the IMF, the ministry said, adding that it wants to avoid a hard default.
Rajapaksa’s administration is also seeking aid from nations including India and China, which is one of its biggest creditors.
“China has been doing its utmost to provide assistance to the socioeconomic development of Sri Lanka, and will continue to do so going forward,” a Sri Lankan Ministry of Foreign Affairs representative told a briefing.
Sri Lanka’s US dollar bonds due July yesterday fell US$0.018 on the dollar to a fresh record low US$0.4607. The rupee lost 0.5 percent. The nation’s stock market is shut this week for public holidays after trading for shortened hours due to the daily power cuts.
“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.”
Nomura Holdings Inc expects an “Ecuador-style debt restructuring” where the existing stock of bonds are exchanged into three longer-dated bonds with a reduction in coupon rates and some principal haircut, said Nicholas Yap, head of Asia credit desk analysts in Hong Kong.
Sri Lanka’s foreign exchange reserves slumped 16 percent to US$1.94 billion last month. The government was due to make a US$36 million interest payment on a 2023 US dollar bond on Monday next week, as well as US$42.2 million on a 2028 note, Bloomberg-compiled data show. A $1 billion sovereign bond is to mature on 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 would not resign under any circumstances.
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