Sri Lanka Defaults On Debts For The First Time, Central Bank Governor Warns Inflation To Surge To 40%

The coupon payments, originally due April 18, were worth $78 million combined on notes maturing 2023 and 2028, with a 30-day grace period that expired on Wednesday

New Delhi: Sri Lanka has defaulted on its debt for the first time since it gained independence from Britain in 1948. The island nation has defaulted at a time when the world is trying to bounce back from economic crisis triggered by global waves of pandemic and impact of Russian-Ukraine conflict.

“Policy makers had flagged to creditors that the nation wouldn’t be able to make payments until the debt is restructured, and is therefore in pre-emptive default,” said central bank governor Nandalal Weerasinghe on Thursday, news agency Bloomberg reported.

The coupon payments, originally due April 18, were worth $78 million combined on notes maturing 2023 and 2028, with a 30-day grace period that expired on Wednesday, according to the report.

Most of Sri Lanka’s bonds have so-called cross-default clauses, which happen to pull down all the outstanding dollar debt into default if there’s a missed payment in a single bond, according to the report. On the debt due in 2023 and 2028, the clause is triggered if any payment that exceeds $25 million is not met. The country has already been listed in selective default by S&P Global Ratings in late April.

It is the first default by an Asia-Pacific nation this century, noted the credit rating agency Moody’s as per the Guardian report.

Weerasinghe warned that the inflation rate may zoom past 40 per cent in coming months triggered by falling currency and economic crisis that has left the country short of the hard currency required to import food and fuel. The shortages of food, fuel and medicines and regular power blackouts had triggered nationwide protests and violence. The government is also short of the foreign currency reserves required to pay for imports.

The government announced in April that it would halt payments on its $12.6 billion pile of foreign debt to preserve cash for essential goods.

What is the way out for the island nation?

Looking for a bailout, Sri Lanka has approached the International Monetary Fund where it will need to negotiate a debt restructuring with creditors. The country has previously said it needs between $3 billion and $4 billion this year to pull itself out of crisis.

On Thursday, Weerasinghe said that he’d like to see a finance minister appointed to sign off on any aid agreements. However, the political situation has improved with the appointment of a Prime Minister and Weerasinghe said that gives him comfort to continue in his job.