Virendra Pandit
New Delhi: In an extraordinary move, a heavily debt-trapped Sri Lanka on Tuesday defaulted on its whopping USD 51 billion foreign debt as the Indian Ocean’s beautiful island nation grappled with its worst economic crisis and countrywide protests demanding the Rajapaksa government’s resignation.
On Tuesday, a US dollar could buy 325 Sri Lankan rupees, showing the country’s devalued currency.
In Colombo, the finance ministry said the country was defaulting on all external obligations, including loans from foreign governments, ahead of an attempted International Monetary Fund bailout, according to the media reports.
“The government is taking the emergency measure only as a last resort in order to prevent further deterioration of the republic’s financial position,” it said in a statement, adding the creditors were free to capitalize on any interest payments due to them or opt for payback in Sri Lankan rupees.
Sri Lanka’s snowballing economic crisis began weeks ago because of its inability to import essential goods after the coronavirus pandemic severely depleted vital revenue from tourism and remittances.
The government banned imports to conserve its plummeting foreign currency reserves and use them to service the debts it has now defaulted on.
According to experts, the crisis worsened with the Rajapaksa government’s own mismanagement, years of accumulated borrowing leading to debt traps, and ill-advised tax cuts.
Thousands of angry people have been camping outside President Gotabaya Rajapaksa’s office in Colombo on the fourth straight day of protests calling for him to step down
In 2021, international rating agencies had downgraded Sri Lanka, effectively blocking it from accessing foreign capital markets to raise new loans and meet the demand for food and fuel imports. A desperate Colombo had sought debt relief from India and China, but they offered more credit lines to buy commodities from them. Recently, India shipped fuel and food grain to the neighboring country.
Official reports said that China and Japan, two key bilateral sovereign creditors, hold about 10 percent each of Sri Lanka’s foreign debt, while India’s share is less than five percent. And less than half of Sri Lanka’s debt is market borrowings through international sovereign bonds and other instruments.
To service its debt load this year, Sri Lanka requires USD 7 billion, but it had only USD 1.9 billion in foreign currency reserves by March-end.
Earlier, Sri Lanka’s finance ministry said in a statement that all outstanding payments to bondholders, bilateral creditors, and institutional lenders will be suspended until a debt restructure.
The Central Bank of Sri Lanka’s new Governor, Dr. P. Nandalal Weerasinghe, said officials are attempting to negotiate with creditors.
His announcement followed after President Gotabaya Rajapaksa’s minority government struggled to cool down fierce, country-wide protests as it braced to hold bailout talks with the International Monetary Fund (IMF) to avoid a hard default.
Reeling under the severest economic crisis since its Independence from Britain in 1948, Colombo is due to make a USD 36 million interest payment on a 2023 dollar bond next week (April 18), and USD 42.2 million on a 2028 note. A USD 1 billion sovereign bond would mature on July 25, according to reports.
The unprecedented economic crisis has sparked a political stalemate, which may complicate efforts to negotiate aid. On Monday, Prime Minister Mahinda Rajapaksa urged the angry protesters to be patient even as prices continued to surge and the shortage of essential items worsened. He also tried to reinforce the people’s support, citing his family’s role in ending a decades-long civil war in 2010. His brother, President Gotabaya Rajapaksa is, however, digging in and has ruled out resignation under any circumstances.
In an effort to explain the crisis, PM Mahinda said the Covid-19 lockdowns in an already weak economy had depleted foreign currency reserves which made imports very difficult in a country whose economy depended largely on global tourism, and remittances by expatriates who lost jobs during the pandemic.
As a result, shortages of food and fuel, together with record inflation and regular blackouts, have inflicted unprecedented misery on the Sri Lankan people.
In an address to the nation, he said: “We are facing this crisis, right after facing the pandemic. Despite knowing the country’s economy going down, we had to impose a lockdown, and that’s why our foreign exchange reserves depleted.”
“The President and I are spending every moment to formulate solutions on how to get Sri Lanka out of this current crisis,” he said.
To control the violent protests, Colombo had, last week, announced additional public holidays to coincide with the traditional Sinhalese and Tamil New Year.
The PM also appealed to the protesters to end their anti-government agitation and said that every minute spent on the streets deprives the country of dollar inflow.
He acknowledged that the cost of living in Sri Lanka is going from bad to worse because of the spiraling prices of essential food articles, including medicine, milk powder, rice, sugar, dhal, wheat flour, and items like cooking gas, diesel, kerosene oil and petrol.
“After winning the civil war in 2010 we won the election, but people forgot the story. I remember. I promise there will never be blackouts in the future. We made a proposal to the power plant, but the former government didn’t support it. They are responsible for it,” Mahinda said as he sought to blame his predecessors for the worsening crisis.
His address came hours after Opposition Leader Sajith Premadasa alleged that the poor economic policies of the Rajapaksa government had contributed to the Indian Ocean country’s economic downturn.