Sri Lanka announces default on its entire $51bn external debt amid worst economic crisis in memory

Government says it is waiting for bailout from International Monetary Fund to be able to meet its obligations

Sri Lanka has announced an unprecedented default on all its external debt worth $51bn amid the worsening economic crisis afflicting the island nation.

The country’s finance ministry said in a statement on Tuesday that the impacts of the pandemic and the Ukraine war made it “impossible” to pay its creditors, including foreign governments, and that the government would instead prioritise preserving its dwindling foreign currency reserves.

“Recent events, however... have eroded Sri Lanka’s fiscal position [to the point] that continued normal servicing of external public debt obligations has become impossible,” it said in a statement.

“A comprehensive restructuring of these obligations will be required,” it added.

The South Asian country has seen mass protests against the government in recent weeks as it suffers fuel and food shortages, resulting in inflation, shortages of many basic necessities and hours-long power cuts.

The country said it is waiting for a bailout from the International Monetary Fund to be able to meet its debt obligations, which the international body has already assessed as unsustainable. It is also seeking help from other countries.

The move breaks Sri Lanka’s “unblemished record” of paying its international debts since it won independence from British rule in 1948, the statement said.

The ministry also said the creditors are free to capitalise on interest payments due from Tuesday afternoon or opt for payback in Sri Lankan rupees.

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

It has an estimated $8.6bn in debt payments due this year, according to an analysis by Bloomberg.

The newly appointed central bank chief P Nandalal Weerasinghe also said the country should not use “limited forex available for debt payment”. However, he added that there is no reason to restructure domestic debt.

The central bank earlier hiked interest rates by 7 per cent, almost doubling them, to tackle soaring inflation and avoid a bond default.

Sri Lanka has been witnessing long queues of people trying to buy scarce essentials and public anger has led to widespread protests around the island nation, including the occupation of president Gotabaya Rajapaksa’s residence.

The government had announced an emergency to tackle rising the demonstrations and shut down social media platforms for a brief period.

The crisis and protests prompted many cabinet members to resign. Four ministers were sworn in as caretakers, but many of the key portfolios are vacant.

Parliament has failed to reach a consensus on how to deal with the crisis after nearly 40 governing coalition lawmakers said they would no longer vote according to coalition instructions, significantly weakening the government.

With opposition parties divided, they too have not been able to form a majority and take control of parliament.

Further talks with the IMF are expected later this month, and the government has also turned to China and India for emergency loans to buy food and fuel.