Sri Lanka Freezes Foreign Debt Payment As Forex Reserves Dwindle

Sri Lanka's central bank said on Tuesday it had become "challenging and impossible" to repay external debt, as it tries to use its dwindling foreign exchange reserves to import essentials like fuel, Uditha Jayasinghe and Jorgelina Do Rosario reported for Reuters.

Photo Insert: The Central Bank of Sri Lanka

The island nation's reserves have slumped more than two-thirds in the past two years, as tax cuts and the COVID-19 pandemic badly hurt its tourism-dependent economy and exposed the government's debt-fueled spending.

It is also heavily indebted to China. Street protests against shortages of fuel, power, food, and medicine have gone on for more than a month.

"We need to focus on essential imports and not have to worry about servicing external debt," Central Bank of Sri Lanka's governor, P. Nandalal Weerasinghe, told reporters. "It has come to a point that making debt payments are challenging and impossible."

Weerasinghe said the suspension of payment would be until the country came to an agreement with creditors and with the support of a loan program with the International Monetary Fund (IMF). Sri Lanka starts formal talks with the global lender on Monday for emergency loans.

The country has foreign debt payments of around $4 billion due this year, including a $1 billion international sovereign bond maturing in July. Two coupon payments are due on Monday. "It is a default. This was inevitable," said Murtaza Jafferjee, the chief executive of brokerage J.B Securities.

"This is a positive for the economy because we were using scarce foreign exchange resources to service our debt when we could not afford to. This will release funds for our own citizens. It was displaced vanity at the cost of our population." He said Sri Lanka’s decision covers about $25 billion in bilateral and commercial debt, which includes about $12 billion of international sovereign bonds.

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