Sri Lanka is no longer servicing its debt

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After months of crisis, Sri Lanka declared economic collapse on Tuesday. Debt service on the entire $51 billion debt will be suspended, at least temporarily, said central bank governor P. Nandalal Weerasinghe, who was only appointed last week. All overdue payments to bondholders, bilateral lenders and institutional donors such as the Asian Development Bank (ADB), World Bank and International Monetary Fund (IMF) will be suspended. This is the first time that the island in crisis has ceased to serve its creditors.

But the objective remains to restructure the debt, according to a press release from the Ministry of Finance. It has been led since late last week by Ali Sabry, the former justice minister and confidant of the ruling Rajapaksa family clan. He had initially refused to accept the too demanding post. Officials are currently negotiating next steps with primary creditors.

Due to the shortage of dollars, there is practically no fuel left on the island and electricity is only available with huge interruptions. Imported machinery, fertilizers and, for a few weeks now, food are also in short supply, and meanwhile the shortage of medicines has led public hospitals to suspend non-essential operations since April 7. Inflation is at 20% and traders are hoarding food in anticipation of even higher prices. Demonstrations against the Rajapaksa family are increasing. Along with Gotabaya Rajapaksa, the Rajapaksa family still holds the office of President, and with his older brother Mahinda, the family also holds the office of Prime Minister in South Asia’s oldest democracy. Western embassies are about to activate contingency plans and initially evacuate employees’ relatives.

The Ministry of Finance said on Tuesday that the decision was “a last resort to prevent a further deterioration in the financial situation of the Republic”. The announcement added: “It is now apparent that any further delays risk causing permanent damage to the Sri Lankan economy and potentially irreversible damage to the holders of the country’s external debt.” However, the Rajapaksa party, which citizens had elected to govern, lost its majority in parliament last week. Due solely to the resignation of many ministers, bailout talks with the IMF continue to be delayed. Sabry announced that he would fly to Washington on Easter Monday to begin negotiations with multilateral organizations. So far, there are not even enough qualified participants in the mission, which is vital for the state with its 22 million people, except for Weerasinghe.

The central bank governor sought Tuesday morning to reassure markets that had been anticipating the collapse for months. “It will be temporary until we reach an agreement with creditors and support through a program with the IMF,” he urged the fund in Washington. “We must focus on essential imports and not worry about servicing external debt,” he added.

Sri Lanka needs $3 billion immediately to pay for its most urgent imports. On April 18, $36 million and $42.2 million in interest are due on two bonds, and on July 25, another $1.03 billion is due to be repaid. In total, at least $7 billion in loans are due in 2022. The value of all dollar obligations is just under $13 billion. But at the end of March, Sri Lanka’s dollar reserves stood at just $1.94 billion. The rupee lost another 0.5% of its value against the dollar on Tuesday. Stock trading is suspended this week. Last week, the Colombo Stock Exchange only opened intermittently due to power outages.

Image by Karthikeyan Perumal

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