Crisis-hit Sri Lanka braces for debt default as dollars run out

Sri Lanka is poised to default on its foreign debt as the grace period for missed payments expires on Wednesday, with the government scrambling for dollars to top up depleted fuel supplies. The country said last month it would stop repaying international debt due to an economic and balance of payments crisis that has left it in effect without foreign reserves. It does not have a fully functioning government after President Gotabaya Rajapaksa’s cabinet resigned last week. Sri Lankans are suffering severe shortages of fuel, food and medicine, with multi-hour power cuts and queues for petrol and diesel. A protest movement has called on Rajapaksa to step down. Sri Lanka, Asia’s largest high-yield bond issuer and an enthusiastic participant in Beijing’s Belt and Road international infrastructure scheme, owes a total of more than $50bn to private bondholders and nations including China, India and Japan. The grace period for interest payments on two $1.25bn international sovereign bonds maturing in 2023 and 2028 will end on Wednesday, triggering cross-default clauses that could bring much of the total debt due before Colombo has begun formal restructuring talks. “We defaulted with an idea that we would have a restructuring process starting,” said Manjuka Fernandopulle, a lawyer specialising in debt restructuring. “And that seems not to be moving anywhere . . . The cabinet is not there. The urgency of starting a restructuring process has fallen to the background.” Sri Lanka has begun talks with the IMF and bilateral creditors for emergency loans to alleviate the shortages, but the government has still not appointed a finance minister. Prime Minister Ranil Wickremesinghe, an unpopular veteran leader who was appointed last week by his longtime rival Rajapaksa, said on Monday that the island was struggling to find dollars to replenish its dwindling fuel supplies. “It is a challenge for the Treasury to find $1mn,” he said in a televised address. “The next couple of months will be the most difficult of our lives. We must prepare ourselves to make sacrifices.” Sri Lanka became a popular destination for bondholders looking for high-yielding investment opportunities after the end of its civil war in 2009, when the ruling Rajapaksa family used debt-backed infrastructure projects to fuel growth. The island, which has never missed debt payments, joins countries including Zambia and Ecuador in defaulting as the coronavirus pandemic took its toll.

But apart from Covid-19, analysts blamed mismanagement by Rajapaksa, who cut taxes and imposed a ban on chemical fertilisers that damaged agricultural production. The drop in tourism during the Covid crisis only worsened the pain. Anger towards Rajapaksa boiled over last week when attacks on protesters by pro-government mobs triggered a wave of retaliatory violence, forcing the resignation of Rajapaksa’s once-powerful brother Mahinda Rajapaksa as prime minister and prompting the president to deploy the military to enforce a curfew. Several countries including the UK have issued advisories warning against all but essential travel to the island, further damping tourist flows.