Sri Lanka declares bankruptcy

Sri Lanka declares bankruptcy

2 Min
South Asian Digest

The Government yesterday signaled Sri Lanka was bankrupt, announcing a temporary suspension of repayment of all external debt as of yesterday, saying the country can no longer honour its commitment owing to poorer financial position caused by external and internal shocks.

The move puts an end to Sri Lanka’s outstanding track record of servicing its external debt obligations since the independence but a “negotiated or soft default” is viewed as more respectable as opposed to a disastrous “hard default”.

Treasury Secretary Mahinda Siriwardena told journalists yesterday that the “orderly and consensual” restructuring of external debt obligations will be buttressed by an economic assistance program supported by the International Monetary Fund (IMF).

He recalled that Sri Lanka has had an unblemished record of external debt servicing since independence in 1948.

“However recent events including the COVID-19 pandemic and fallout from the hostilities in Ukraine, eroded Sri Lanka’s fiscal position,” he said.

“Late last month the IMF assessed that Sri Lanka’s debt stock is unsustainable. This is although the Government had taken extraordinary steps in an effort to remain current on all its external indebtedness it is now clear that this is no longer a tenable policy and a comprehensive restructuring of these obligations will be required,” Finance Ministry Secretary admitted.

Confronted by this hard reality, Siriwardena said the Government has approached the IMF for assistance in designing an economic recovery program and for emergency financial assistance.

The Government is also seeking financial help from its other multilateral and bilateral partners to alleviate the sufferings that the extraordinary situation has caused on the people.

“We have lost the ability to repay foreign debt. It has come to a point that making debt payments are challenging and impossible,” Central Bank Governor Dr. Nandalal Weerasinghe said at the media briefing adding: “We need to focus on essential imports and not have to worry about servicing external debt.”

“This is a pre-emptive negotiated default. We have announced it to the creditors,” the new CBSL Chief added.

Sri Lanka has around $ 6 billion of external debt servicing for the rest of 2022 whilst usable reserves had plunged to a historic low of a mere $ 150 million. Between next year and 2026 Sri Lanka’s external debt servicing is estimated at $ 25 billion.

Sources said yesterday’s announcement is expected to force rating agencies to downgrade Sri Lanka to Restrictive or Selective default (RD/SD).

The Government’s move comes after two years of denial by President Gotabaya Rajapaksa’s regime and successive Central Bank Governors that Sri Lanka’s external debt is sustainable and will not default by relying on “homegrown” measures.

This was after the country was shunned from international capital markets following the downgrade of its sovereign credit rating.

—By Nisthar Cassim in Daily FT, 13 April 2022 0

https://www.ft.lk/top-story/Sri-Lanka-declares-bankruptcy/26-733409