Sri Lanka to default on external debt of $51 bn pending IMF bailout: Report

Crisis-ridden Sri Lanka on Tuesday said it was defaulting on its external debt of around $51 billion pending a bailout from the International Monetary Fund, with whom talks are scheduled for later this month.

Sri Lanka’s finance ministry said creditors, including foreign governments, were free to capitalise interest payments due from Tuesday afternoon or opt for payback in Sri Lankan rupees.

Officials earlier said the island nation – living through its worst economic crisis in decades – would temporarily suspend foreign debt payments to avoid a hard default and conserve its limited foreign reserves for the import of essential items like food, fuel, and medicine.

“It has come to a point that making debt payments are challenging and impossible. The best action that can be taken is to restructure debt and avoid a hard default,” Sri Lanka’s central bank governor P Nandalal Weerasinghe told reporters.

Sri Lanka’s foreign exchange reserves dropped 16.1 per cent to $1.93 billion in March from a month earlier, the central bank said last week.

An estimated $8.6 billion in debt payments fall due this year, according to an analysis by Bloomberg, and rapidly falling reserves raise questions about Sri Lanka’s ability to pay even a part of this sum.

Sri Lanka had about $2.3 billion of foreign reserves in February.

The country also faces a test of global investor confidence later this month, Bloomberg reported, when interest payments on a 2023 dollar bond and 2028 note fall due; the two combined amount to $78.2 million.

“To get out of the crisis, the quick establishment of an effective government should be the first priority. Clinching a deal with the International Monetary Fund (IMF) should be next,” Bloomberg Economics’ economists Ankur Shukla and Abhishek Gupta wrote.