As a “last resort,” Sri Lanka announced a pre-emptive default on all of its foreign debt, totaling $51 billion, on Tuesday. The island nation is grappling with a severe economic crisis.
The government is implementing “emergency steps” to avert further deterioration of the country’s financial situation, according to the Finance Ministry, pending comprehensive consultations with the International Monetary Fund (IMF), from which it has sought assistance. It said in a statement that a comprehensive debt restructuring procedure was now “inescapable.”
The decision follows two other significant policy changes. Sri Lanka devalued its currency after it was floated in early March, allowing for a sharp decline – it was about 320 versus the US dollar on Tuesday. More recently, the Central Bank raised interest rates by 7% in an effort to tighten monetary policy, ostensibly in anticipation of an IMF package that the government wishes to “accelerate.”
“The question now is how ISB holders regard this decision,” said Harsha De Silva, an opposition member, and economist.
He was referring to International Sovereign Bonds, or market borrowings, which make up the majority of Sri Lanka’s foreign debt, accounting for about half of the country’s total.
“Instead of entering into a unilateral, hard default like this, the government should have ideally sought their consent.” He stated, “They have truly run out of money.” When Parliament reconvenes on April 19, the opposition United National Party has demanded “a complete explanation” of what led to “this scenario.”
“While this is in effect a form of default, it is better than a scenario where GoSL simply fails to make a particular coupon or bond payment coming due (several coming in the next weeks and months); MoF has taken a “policy stance” applicable to all and attempts to build goodwill,” economist Anush Wijesinha said in a tweet in response to Tuesday’s default announcement.
The government’s decision to default even before starting talks with the IMF, according to Ahilan Kadirgamar, a political economist at the University of Jaffna, meant that “Sri Lanka has entirely lost its bargaining strength” with the international lender.
Sri Lanka has been warned about potential impact
Some in Sri Lanka have been warning about the potential impact of IMF conditionalities on ordinary people since the government reluctantly agreed to go into an IMF program, including possible tax hikes across the board, austerity-driven cuts in state spending, and a push to privatize loss-making state-owned enterprises.
“This IMF program is likely to have the same impact as Sri Lanka’s structural adjustment program in 1977-78 when it became the first country in South Asia to liberalize its economy. Mr. Kadirgamar argued that “it might constitute a full-scale assault on what remains of our social safety system, displacing our working people and undermining our legacy of high levels of human development.”
Despite past economic difficulties, Sri Lanka had a spotless track record of debt servicing, making it a desirable partner for creditors.
Meanwhile, the Governor of Sri Lanka’s Central Bank has appealed to Sri Lankans living abroad for “much-needed foreign exchange” donations to help the country’s reserves as it grapples with severe food, fuel, and medicine shortages. Recently appointed Governor P. Nandalal Weerasinghe told “well-wishers” that their foreign currency donations will be used solely for “necessary goods” in a statement released on Tuesday.
India has provided Sri Lanka with a billion-dollar credit line to assist with imports. Delivery of 11,000 MT of rice landed in the island nation on Tuesday, following the arrival of 5000 MT via the Line of Credit.