Sri Lanka falls into default for first time in its history

Government seeks debt restructuring as it moves to ease chronic fuel shortage

Sri Lanka has fallen into default for the first time in its history as the government struggles to halt an economic meltdown that prompted mass protests and a political crisis.

Policymakers had flagged to creditors that the nation would not be able to make payments until the debt is restructured, and is therefore in pre-emptive default, central bank governor Nandalal Weerasinghe said at a briefing on Thursday. The coupon payments, originally due April 18th, were worth $78 million (€74m) combined on notes maturing 2023 and 2028, with a 30-day grace period that expired on Wednesday.

Mr Weerasinghe said plans for a debt restructuring were almost finalised and he would be submitting a proposal to the cabinet soon.

However, he said the central bank had secured foreign exchange to pay for fuel and cooking gas shipments that will ease crippling shortages.

Most of Sri Lanka’s petrol stations have run dry as the island nation battles its most devastating economic crisis since independence in 1948. At some pumps in the commercial capital, Colombo, dozens of people stood in lines holding plastic jerry cans, as troops in combat gear and armed with assault rifles patrolled the streets. Traffic was extremely light.

Residents said most people were staying at home because of the lack of transport.

Hundreds of students carrying black flags marched on Colombo’s central Fort area, chanting slogans against the government. Police fired repeated rounds of tear gas and water canon to push them back, according to a Reuters witness.

Mr Weerasinghe told a news conference adequate dollars had been released to pay for fuel and cooking gas shipments, utilising in part $130 million received from the World Bank and remittances from Sri Lankans working overseas.

He was speaking after the central bank held interest rates steady at a policy meeting, citing a massive seven percentage-point increase in April that it said was working its way through the system.

The country was more politically and economically stable, Mr Weerasinghe said, adding that he would stay on in his post. He told reporters on May 11th he would resign in two weeks in the absence of political stability as any steps the bank took to address the economic crisis would not be successful amid turmoil.

Opposition parliamentarian Ranil Wickremesinghe was named prime minister last week and he has made four cabinet appointments. However, he has yet to name a finance minister.

Inflation could rise further to a staggering 40 per cent in the next couple of months but it was being driven largely by supply-side pressures and measures by the bank and government were already reining in demand-side inflation, the central bank governor added.

Inflation hit 29.8 per cent in April with food prices up 46.6 per cent year-on-year.

Sri Lanka’s economic crisis has come from the confluence of the Covid-19 pandemic battering the tourism-reliant economy, rising oil prices and populist tax cuts by the government.

Other factors have included heavily subsidised domestic prices of fuel and a decision to ban the import of chemical fertilisers, which devastated the agriculture sector. – Reuters/Bloomberg