Sri Lanka’s central bank said on Tuesday it had become “challenging and impossible” to repay external debt, as it tries to use its dwindling foreign exchange reserves to import essentials like fuel. Reuters has more.
The island nation’s reserves have slumped more than two-thirds in the past two years, as tax cuts and the COVID-19 pandemic badly hurt its tourism-dependent economy and exposed the Government’s debt-fuelled spending.
Street protests against shortages of fuel, power, food and medicine have gone on for more than a month.
“We need to focus on essential imports and not have to worry about servicing external debt,” Central Bank of Sri Lanka’s Governor, P. Nandalal Weerasinghe, told reporters.
“It has come to a point that making debt payments are challenging and impossible.”
Weerasinghe said the suspension of payment would be until the country came to an agreement with creditors and with the support of a loan programme with the International Monetary Fund (IMF). Sri Lanka starts formal talks with the global lender on Monday for emergency loans.
The country has foreign debt payments of around $4 billion due this year, including a $1 billion international sovereign bond maturing in July. Two coupon payments are due on Monday.
“It is a default. This was inevitable,” said Murtaza Jafferjee, the Chief Executive of brokerage J.B Securities.
“This is a positive for the economy because we were using scarce foreign exchange resources to service our debt when we could not afford to. This will release funds for our own citizens. It was displaced vanity at the cost of our population.”
Doctors in the country have warned that the economic crisis could lead to far more deaths than the COVID-19 pandemic, as they are nearly out of life-saving medicines.
A statement from the Ministry of Finance blamed the pandemic and Ukraine war in particular:
Recent events, however, including the effects of the COVID-19 pandemic and the fallout from the hositlities in Ukraine, have so eroded Sri Lanka’s fiscal position that continued normal servicing of public debt obligations has become impossible.
It seems there’s a limit to how much countries, especially less wealthy countries, can borrow to fund lockdowns on top of the usual deficit spending. How many more countries will now default as the profligacy of the last two years catches up with them?
Worth reading in full.
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