Sri Lanka temporarily suspends foreign debt payments to avoid default

Tuesday, 12 April 2022 - 13:08

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The finance ministry in a press release said that the Sri Lankan government is suspending normal debt servicing of all affected external debts.  Sri Lanka is entering into a ‘pre-emptive negotiated default’ by giving notice ahead of time and asking lenders to come to the negotiating table, which is not a ‘hard default’ Central Bank Governor Nandalal Weerasinghe said.

The Sri Lankan government announced it would default on its external debt (estimated at $51 billion ) pending a bailout from the International Monetary Fund.

For record-keeping purposes (and for purposes of determining the outstanding principal amount of Affected debts in the eventual restructuring), all principal and interest payments falling due after 5.00 p.m. local time today (12 April), under Affected Debts shall be deemed to have been capitalized (that is, added to the outstanding principal of the relevant debt) and such amounts shall bear interest during the interim period at the normal contractual rate applicable to that credit. Promptly after the scheduled due date for each amount of principal or interest affected by this policy, the Ministry of Finance shall send to the creditor (or to the relevant trustee or fiscal agent) written confirmation of the new principal amount of the Affected Debt as shown on the Ministry records.

The Finance Ministry said it would stand ready to execute a short-form instrument confirming the capitalization of maturing amounts for creditors that may require such documentation for regulatory or accounting purposes.

The holder of an Affected Debt that wishes to receive the Sri Lankan rupee equivalent of an amount falling due during the interim period in lieu of the capitalization of that amount, should contract the Finance Ministry as soon as practicable, but no later than one month from the day on which such amount fell due.

The Finance Ministry said it would attempt to accommodate such requests provided that doing so is consistent with the Central Bank’s monetary policy and is feasible under the relevant credit documentation.

The finance ministry said creditors, including foreign governments, were free to capitalise any interest payments due to them from Tuesday afternoon (12) or opt for payback in Sri Lankan rupees.

Sri Lanka will temporarily suspend foreign debt payments to avoid a hard default, the central bank governor said today(12), with its limited foreign reserves required for imports of essential items such as fuel.

"It has come to a point that making debt payments are challenging and impossible. The best action that can be taken is to restructure debt and avoid a hard default," Governor P. Nandalal Weerasinghe told reporters.

Sri Lanka is due to start talks with the International Monetary Fund (IMF) on a loan programme next week, with the country suffering from prolonged power cuts alongside shortages of food and medicines.

Sri Lanka's foreign reserves stood at a paltry $1.93 billion at the end of March, with foreign debt payments of around $4 billion due this year, including a $1 billion international sovereign bond maturing in July.

The governor said the action was being taken in good faith, emphasizing that the country of 22 million people had never defaulted on its debt payments.

"This will be on a temporary basis until we come to an agreement with creditors and with the support of a programme with the IMF," said Governor P. Nandalal Weerasinghe, who took office last week.

"We need to focus on essential imports and not have to worry about servicing external debt," he said.

"It has come to a point that making debt payments are challenging and impossible. The best action that can be taken is to restructure debt and avoid a hard default," Central Bank Governor P. Nandalal Weerasinghe told reporters.

FULL statement on Interim Policy Regarding the Servicing of Sri Lanka's External Public Debt