Sri Lanka unilaterally suspends payment of external debt, says it needs money for essentials
By Uditha Jayasinghe and Jorgelina do Rosario
COLOMBO/LONDON (Reuters) – Sri Lanka’s central bank said on Tuesday it had become “difficult and impossible” to repay its external debt, as it tries to use its dwindling foreign exchange reserves to import goods essentials like fuel.
The island nation’s reserves have fallen by more than two-thirds in the past two years as tax cuts and the COVID-19 pandemic have severely damaged its tourism-dependent economy and exposed government spending fueled by debt.
Street protests over fuel, electricity, food and medicine shortages have been going 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 Governor P. Nandalal Weerasinghe told reporters.
“It’s gotten to a point where paying off the debt is difficult and impossible.”
Weerasinghe said the suspension of payments would continue until the country reached an agreement with creditors and with the support of a loan program with the International Monetary Fund (IMF). Sri Lanka begins formal talks with the global lender for emergency loans on Monday.
The country has foreign debt payments of about $4 billion due this year, including a $1 billion international sovereign bond maturing in July. A coupon payment of $78 million is due on two of its bonds maturing in 2023 and 2028 on Monday, although there is a 30-day grace period.
“It’s a flaw. It was unavoidable,” said Murtaza Jafferjee, managing director of brokerage firm JB Securities.
“It’s good for the economy because we were using scarce currency resources to pay off our debt when we couldn’t afford it. It will free up funds for our own citizens. It was misplaced conceit to the detriment of our population. “
He said Sri Lanka’s decision covers about $25 billion in bilateral and commercial debt, including about $12 billion in international sovereign bonds.
“Today’s memorandum should pave the way for an IMF program, in our view,” JPMorgan’s Milo Gunasinghe said in a note to clients, while warning that political uncertainty remained high.
As the government only started the process of selecting advisers for the debt negotiations over the weekend, formal negotiations with creditors may not begin until appointments are made, Gunasinghe added.
Timothy Ash, senior sovereign emerging markets strategist at BlueBay Asset Management, said “the only surprise is that it took the administration in Colombo so long to come to terms with the reality on the ground.”
“It makes sense to declare a moratorium on payments until they work out a program with the IMF and agree terms with bondholders,” he said.
Sri Lanka’s dollar-denominated sovereign bonds posted healthy gains on Tuesday, with many issues up nearly 2 cents on the dollar, according to Tradeweb data.
Its hard-currency bonds are mostly trading at deeply distressed levels of just under 40 cents to the dollar, while the bond maturing on July 25 last traded at just over 50. cents, according to data from Refinitiv.
Governor Weerasinghe said the call for repayment was made in good faith, stressing that the country of 22 million people had never defaulted on its debt.
(Writing by Devjyot Ghoshal and Krishna N. Das; Editing by Ed Osmond, Raju Gopalakrishnan and Nick Zieminski)