Sri Lanka default looms as debt payments halted to save dollars

Sri Lanka has warned creditors of a possible default and suspended payments on some 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.

Sri Lanka’s dollar bonds due July 2022 fell 1.8 cents on the dollar on Tuesday to a record low 46.07 cents. The rupee lost 0.5%.

The announcement comes as the government of President Gotabaya Rajapaksa struggles to tamp down protests and form a majority in parliament, just as its seeking to begin bailout talks with International Monetary Fund. The government will expedite talks with the IMF, the finance ministry said Tuesday, and wants to avoid a hard default. 

“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.”

The government is 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. Prime Minister 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.