COLOMBO: The Sri Lanka government declared bankruptcy on Tuesday (April 12).
They declared a temporary suspension of all external debt repayments as of Tuesday, claiming that the country can no longer meet its obligations due to worsening financial conditions brought on by external and domestic shocks.
Sri Lanka’s remarkable track record of servicing its external debt obligations since independence has come to an end, although a “negotiated or soft default” is seen as more respectable than a disastrous “hard default.”
According to Ministry of Finance secretary Mahinda Siriwardana, the “orderly and consensual” restructuring of foreign debt commitments, would be bolstered by an economic aid programme backed by the International Monetary Fund (IMF).
He observed that since its independence in 1948, Sri Lanka has maintained a spotless record of servicing external debt.
“However, recent developments, like as the COVID-19 pandemic and fallout from the hostilities in Ukraine, have weakened Sri Lanka’s budgetary position.
“The IMF recently concluded that Sri Lanka’s debt stock is unsustainable. Despite the Government’s remarkable efforts to stay current on all of its external debt, it is now evident that this is no longer a viable policy, and a comprehensive restructuring of these commitments will be required,” he stated.
Faced with this harsh reality, Siriwardana said the government has sought support from the IMF in developing an economic recovery plan as well as immediate financial assistance.
The government is also seeking financial assistance from its other multilateral and bilateral partners to help ease the people’s sufferings as a result of the unprecedented circumstance.
“We no longer have the financial means to repay our foreign debt. It has gotten to the point where making debt payments are difficult, if not impossible.
“We need to concentrate on vital imports and not be concerned about paying off external debt.
“This is a pre-emptive negotiated default. We have announced it to the creditors,” said the Central Bank Governor Dr Nandalal Weerasinghe.
Sri Lanka’s external debt servicing for the rest of 2022 is estimated to be around $ 6 billion, while usable reserves have plummeted to a historic low of just $ 150 million. Sri Lanka’s external debt servicing is expected to cost $ 25 billion between next year and 2026.
According to sources, the announcement on Tuesday would force rating agencies to downgrade Sri Lanka to Restrictive or Selective Default (RD/SD).
