Sri Lanka unilaterally suspends foreign debt payments, says it needs money for necessities

COLOMBO/LONDON (Reuters) – Sri Lanka’s central bank said on Tuesday that paying its foreign debt has become “difficult and impossible” as it tries to use dwindling foreign exchange reserves to import essentials such as 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 hit its tourism-dependent economy hard and exposed government debt-fueled spending.

Street protests against shortages of fuel, electricity, food and medicine have continued for more than a month.

“We need to focus on core imports and we don’t have to worry about external debt servicing,” Sri Lankan central bank governor P Nandalal Weerasinghe told reporters.

“We have reached the point that paying off debt is challenging and impossible.”

Weerasinghe said the suspension of payments would continue until the country reached an agreement with creditors and backed by a loan program with the International Monetary Fund. Sri Lanka will start formal talks with the global lender on Monday for emergency loans.

The country’s foreign debt payments are about $4 billion due this year, including $1 billion in international sovereign bonds due in July. Two coupon payments are due on Monday.

“This is a default. It was inevitable,” said Murtaza Jafferji, chief executive of brokerage JB Securities.

“This is positive for the economy because we were using scarce foreign exchange resources to service our debt when we could not afford it. This will release money to our citizens. The vanity has been replaced at the expense of our population.”

He said Sri Lanka’s decision covers about $25 billion in bilateral and commercial debt, which includes about $12 billion in international sovereign bonds.

“The only surprise is that management in Colombo has taken so long to come to terms with the reality on the ground,” said Timothy Ash, senior emerging markets strategist at BlueBay Asset Management.

“It makes sense to announce a delay in payment until they work out a program with the International Monetary Fund and agree terms with bondholders,” he said.

Tradeweb data showed that Sri Lanka’s dollar-denominated sovereign bonds enjoyed healthy gains on Tuesday, with long-dated issues up more than 1 cent in the dollar.

Its hard-currency bonds are trading mostly at very distressing levels of just under 40 cents on the dollar while its July 25 bonds are trading at just over 50 cents, according to Refinitiv data.

Governor Wierasinghe said the call for the payment was taken in good faith, stressing that the country of 22 million people has not defaulted on its debts.

Written by Devgyot Ghoshal and Krishna In Das; Editing by Ed Osmond and Raju Gopalakrishnan

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