Sri Lanka announces default on all of its external debt amid ongoing economic crisis

As the country is reeling under the worst economic crisis, Sri Lanka on Tuesday announced it would default on its external debt of $51 billion, pending a rescue from the International Monetary Fund (IMF). The finance ministry of the island nation stated that creditors, including foreign governments that had lent to Sri Lanka, were free to capitalise any interest payments owing to them starting Tuesday afternoon or choose for return in Sri Lankan rupees. Last month, the IMF assessed Sri Lanka's debt stock as unsustainable. 

In a press release, the ministry further stated that the government will consequently suspend normal debt servicing of all Affected Debt for an interim term, pending an orderly and consensual restructuring of those liabilities in accordance with an IMF-supported economic adjustment programme. The government's policy will apply to "Affected Debts" due on April 12, 2022. "After this date, new credit facilities, as well as any sums released under existing credit facilities, are not subject to this policy and will be serviced as usual," it added. 

Until a restructuring proposal can be presented to the creditors for their consideration, holders of all Affected Debts are being asked to capitalise any amounts of principal or interest due during this interim period at an interest rate not exceeding the normal contractual rate applicable to that credit, the ministry further added. Notably, the Sri Lankan government is battling to meet basic requirements for its 22 million citizens amid an unprecedented economic crisis caused by mishandling of finances and ill-timed tax cuts. The crisis was exacerbated further after cabinet ministers resigned on Sunday, April 3, with immediate effect. 

The Finance Ministry claimed that Sri Lanka has maintained an impeccable record of debt service since its independence in 1948. However, it further added that recent developments, such as the COVID-19 pandemic's consequences and the fallout from Ukraine's war, have degraded Sri Lanka's fiscal situation to the point that routine service of external public debt obligations is no longer conceivable. Although the government has gone to great lengths to remain current on all of its external debt current, it is now evident that this is no longer a viable strategy and that a comprehensive restructuring of these debts is essential.

Faced with this harsh reality, Sri Lanka's government has turned to the IMF seeking help in designing an economic recovery plan as well as emergency financial support. The government has also appealed for financial assistance from its other multilateral and bilateral partners in order to ease the hardship that the citizens of Sri Lanka are experiencing as a result of this unprecedented crisis. "The government intends to pursue its discussions with the IMF as expeditiously as possible with a view to formulating and presenting to the country's creditors a comprehensive plan for restoring Sri Lanka's external public debt to a fully sustainable position," the Finance Ministry added.

Sri Lankan crisis

It is pertinent to mention here that the island nation is also currently facing a foreign exchange deficit, which has resulted in food, fuel, power, and gas shortages, and has sought economic assistance from friendly countries. Last week, Sri Lanka also decided to temporarily shut down its embassies in Norway and Iraq, which will come into effect from April 30. Meanwhile, on Saturday, April 2, Sri Lanka received 40,000 MT of diesel from India to aid with the country's power issue. 

Image: AP