Faced with critically low foreign exchange reserves, Sri Lankan Government on Tuesday announced that the country will default on its external debt of around $51 billion pending a bailout package from the International Monetary Fund.
A statement from the finance ministry said it shall be the policy of the Sri Lankan government to suspend normal debt servicing ..shall apply to amounts of affected debts outstanding on April 12, 2022. The policy shall be in effect for all international bonds, all bilateral loans excluding swaps between the Central Bank and a foreign central bank, all loans with commercial banks and institutional lenders, it said.
The debt servicing suspension will be in force for an interim period pending an orderly and consensual restructuring consistent with the proposed arrangement with the IMF. The government in January resisted calls for debt default to pay for its imports.
Since then, the economic crisis has been aggravated by a shortage of food, gas and electricity. People carry out protests throughout the country blaming the government for its mishandling of the economic crisis caused by the forex crisis.
Sri Lanka's external debt servicing obligations were thought to be over USD 6 billion.
In January, a USD 500 million sovereign bond payment was settled. In July another one-billion-dollar payment becomes due.
WA Wijewardena, ex-deputy governor of the Central Bank, said the government was left with very low forex reserves and hence no available options.Yet the policy to suspend debt servicing could be reversed after an agreement with the IMF. Sri Lanka is facing its worst economic crisis since gaining independence from the UK in 1948.
People have been protesting for weeks over lengthy power cuts and shortage of fuel, food and other daily essentials. They are demanding the resignation of the president. President Gotabaya Rajapaksa has defended his government's actions, saying the foreign exchange crisis was not his making and the economic downturn was largely pandemic driven by the island nation's tourism revenue and inward remittances waning.
In this situation, two dissident members who had resigned over the government's handling of the current economic crisis have returned to the party fold, even as widespread anti-government protests continued for the fourth day in Sri Lanka on Tuesday.
The members, including Shantha Bandara who is from former President Maithripala Sirisena's Sri Lanka Freedom Party (SLFP), took oaths as state ministers, days after they had resigned from their positions to protest the government's economic mismanagement.
Last week the entire Sri Lankan cabinet resigned apart from Prime Minister Mahinda Rajapaksa at a time when the country was facing its worst economic crisis.
President Gotabaya Rajapaksa and his elder brother, Prime Minister Mahinda, continue to hold power in Sri Lanka, despite their politically powerful family that has been in power for most of the past two decades being the focus of public ire. Five other family members are lawmakers, three of whom resigned as ministers last Sunday.