In the midst of its greatest economic crisis in over 70 years, Sri Lanka has announced that it will temporarily default on its international loans.
Officials claimed the pandemic’s impact, along with the Ukraine crisis, rendered paying creditors “difficult.”
Food shortages, skyrocketing costs, and power outages have sparked huge demonstrations in the South Asian country.
It will begin discussions with the International Monetary Fund (IMF) on a loan package to help it get its economy back on track next week.
Sri Lanka’s finance ministry said the country has a “unblemished record” of paying its debts since its 1948 independence from the United Kingdom.
“Recent developments, however,” it stated in a statement on Tuesday, “have degraded Sri Lanka’s fiscal situation to the point where sustained regular service of foreign public debt obligations has become untenable.”
Sri Lanka’s debt was deemed unsustainable by the IMF last month, according to the ministry.
“Despite the government’s remarkable efforts to stay current on all of its foreign liabilities, it is clearly evident that this approach is no longer tenable,” it stated.
“These commitments will need to be restructured in their entirety.”
The move has not yet been categorized as a default by credit rating agencies.
When contacted by the BBC, S&P Global Ratings stated it had “nothing to comment at this time.”
Sri Lanka’s credit rating was downgraded to “vulnerable” in January, meaning it was “now fragile and reliant on favorable commercial, financial, and economic conditions to satisfy financial commitments.”
Requests for comment from Moody’s and Fitch Ratings were not immediately returned.
Asia Securities’ Lakshini Fernando praised the action by Sri Lanka’s government, calling it “a better choice than a harsh default.”
“After the announcement, we expect Sri Lanka’s existing credit rating to be reduced to’selective default’ or’restricted default,'” Ms Fernando added.
Sri Lanka has $78 million (£60 million) in foreign sovereign bond payments due next week, she said.
At the end of March, Sri Lanka’s foreign reserves were $1.93 billion. It does, however, owe approximately $4 billion in international debt payments this year.
To combat rising costs and shortages of critical items, the government just appointed a new central bank governor and almost quadrupled its main interest rate.
Demonstrators have marched to the streets of Colombo in recent weeks as homes and businesses have been battered by protracted power outages.
Sri Lankans are facing shortages and soaring prices as a result of the country’s sharp devaluation of its currency last month in preparation for bailout discussions with the International Monetary Fund.