Sri Lanka Default Looms as Debt Payments Halted to Save Dollars

The government will expedite talks with the IMF, the finance ministry said Tuesday, adding that it wants to avoid a hard default.

Sri Lanka Default Looms as Debt Payments Halted to Save Dollars
Vendors at Pettah Market in Colombo, Sri Lanka. (Photographer: Tashiya de Mel/Bloomberg)

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

All outstanding payments to bond holders, bilateral creditors and institutional lenders will be suspended until a debt restructure, the finance ministry said in a statement Tuesday. The newly appointed central bank governor, Nandalal Weerasinghe, said in a briefing that authorities are seeking to negotiate with creditors and warning of a possible default.

The measures are “a last resort in order to prevent a further deterioration of the Republic’s financial position,” the finance ministry said. “It is now apparent that any further delay risks inflicting permanent damage on Sri Lanka’s economy and causing potentially irreversible prejudice to the holders of the country’s external public debts.”

The announcement follows mounting calls for President Gotabaya Rajapaksa and his brother, Prime Minister Mahinda Rajapaksa, to resign. They have been defiant so far -- Gotabaya called for “unity and better understanding” on Tuesday while greeting citizens for the Sinhala and Tamil New Year festival -- despite protests against inflation that’s running at 20% and daily electricity cuts of as long as 13 hours. His party has lost its majority in parliament and bailout talks with the International Monetary Fund are set to be further delayed.

The government will expedite talks with the IMF, the finance ministry said Tuesday, adding that it wants to avoid a hard default. Rajapaksa’s administration is also seeking aid from nations including India and China, which is one of its biggest creditors

“China has been doing its utmost to provide assistance to the socioeconomic development of Sri Lanka, and will continue to do so going forward,” a Foreign Ministry representative said at a briefing Tuesday.

Sri Lanka Default Looms as Debt Payments Halted to Save Dollars

Sri Lanka’s dollar bonds due July 2022 fell 3 cents on the dollar on Tuesday to a fresh record low 45.73 cents. The rupee also slipped. The nation’s stock market is shut this week for public holidays after trading for shortened hours due to the daily power cuts.

“The market was expecting this default to come,” said Carl Wong, head of fixed income at Avenue Asset Management, which no longer holds Sri Lankan bonds. “Now we have to see how the new government handles the onshore chaos while talking to IMF.”

Sri Lanka has about $12.5 billion outstanding in eurobonds, and its next payments are due on April 18, according to data compiled by Bloomberg. That’s when the government is expected to pay $36 million in interest on a bond maturing in 2023 and $42.2 million on a 2028 note. The nation has a slew of other payments due this year, too, including $1.03 billion in principal and interest on a maturing note due on July 25.

Affected payments include:
  • All bonds outstanding in global capital markets
  • All government-to-government credits, except swap lines between central banks
  • All FX loans or credit facilities with commercial banks or multilateral lenders for which the Sri Lankan government or state-run firm is a guarantor

Nomura Holdings Inc. expects an “Ecuador-style debt restructuring” where the existing stock of bonds are exchanged into three longer-dated bonds with a reduction in coupon rates and some principal haircut, said Nicholas Yap, head of Asia credit desk analysts in Hong Kong.

Sri Lanka’s foreign-exchange reserves slumped 16% to $1.94 billion last month. The government was due to make a $36 million interest payment on a 2023 dollar bond April 18, as well as $42.2 million on a 2028 note, Bloomberg-compiled data show. A $1 billion sovereign bond was maturing July 25. 

The economic crisis has evolved into a political stalemate, potentially complicating efforts to negotiate aid. Mahinda Rajapaksa in a speech Monday night called on citizens to be patient as price surges and shortages worsen, while touting his family’s role in ending a decades-long civil war back in 2009. His brother, the president, has said he won’t resign under any circumstances. 

The government hasn’t yet named negotiators for the restructuring process or set a value for the debt recast, Finance Minister Ali Sabry said by phone. Sabry -- who has been in the job for about a week after cabinet resigned en masse -- will be part of Sri Lanka’s team attending the IMF’s spring meetings next week that would discuss a potential aid package.

“We have no choice,” he said, referring to the decision to stop payments. “This should have happened a long time ago.”

©2022 Bloomberg L.P.