Sri Lanka says it will default on all its external debt to pay for food

Sri Lanka warned of an unprecedented default and halted payments on external debt, an extraordinary step taken to preserve its dwindling stock of dollars for essential food and fuel imports.

All overdue payments to bondholders, bilateral creditors and institutional lenders will be suspended pending a debt restructuring, the finance ministry said in a statement on Tuesday. Newly appointed central bank governor Nandalal Weerasinghe said in a briefing that authorities were seeking to negotiate with creditors and warn of a possible default.

These measures are “a last resort in order to avoid a further deterioration of the financial situation of the Republic”, declared the Ministry of Finance. “It is now clear that any further delay risks inflicting permanent damage on the Sri Lankan economy and causing potentially irreversible damage to the holders of the country’s external public debts.”

The announcement follows growing calls for the resignation of President Gotabaya Rajapaksa and his brother, Prime Minister Mahinda Rajapaksa. They have been defiant so far – Gotabaya called for ‘unity and better understanding’ on Tuesday as he greeted citizens for the Sinhalese and Tamil New Year festival – despite protests over inflation hitting 20% and daily power outages of up to 1 p.m. . His party lost its majority in parliament and bailout talks with the International Monetary Fund are expected to be further delayed.

The government will speed up negotiations with the IMF, the finance ministry said on Tuesday, adding it wanted to avoid a default. Rajapaksa’s administration is also seeking help from countries like India and China, which is one of its biggest creditors.

Sri Lanka dollar bonds due July 2022 fell 1.8 cents against the dollar on Tuesday to a new record high of 46.07 cents. The rupee lost 0.5 percent.

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John A. Bogar