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Sri Lanka opts for pre-emptive debt default to combat economic crisis

Sri Lanka on Tuesday announced a pre-emptive default on all its foreign debt totalling $51 billion as a “last resort” while the island nation struggles to cope with a grave economic crisis.

The Government is taking the “emergency measures”, pending full discussions with the International Monetary Fund (IMF) from whom it has sought help, only to prevent a further deterioration of the country’s financial position, the Finance Ministry said. A comprehensive debt restructuring programme was now “inescapable”, it noted in a statement.

The decision comes on the heels of two other key policy changes. Sri Lanka floated the rupee early March, allowing for a stark depreciation of its value — it was nearly 320 against a US dollar on Tuesday. More recently, the Central Bank increased interest rates by 7 percentage points in a bid to tighten monetary policy, apparently in preparation of an IMF package that the government wants to “expedite”.
Sri Lankans queue up near a fuel station to buy kerosene in Colombo on April 12, 2022. Sri Lanka is suspending its repayment of foreign debt, including bonds and government-to-government borrowings, pending the completion of a loan restructuring programme with the International Monetary Fund to deal with the island nation’s worst economic crisis in decades, the government said on April 12, 2022.

“The question now is how ISB holders view this decision,” opposition lawmaker and economist Harsha De Silva told The Hindu. He was referring to International Sovereign Bonds or market borrowings that form the biggest chunk, or nearly half, of Sri Lanka’s foreign debt. “The government should have ideally sought their consent instead of going in for a unilateral, hard default like this. They have really run out of money,” he said. The opposition United National Party has called for “a full explanation” in Parliament, of what led to “this situation” when the legislature convenes on April 19.

Commenting on Tuesday’s default announcement, economist Anush Wijesinha said in a tweet: “While this is in effect a form of default, it is better than a scenario where GoSL simply fails to make a particular coupon or bond payment coming due (several coming in the next weeks and months); MoF has taken a “policy stance” applicable for all; and attempts to build goodwill.”

Ahilan Kadirgamar, political economist at the University of Jaffna, said the government resorting to a default even before commencing negotiations with the IMF meant that “Sri Lanka has completely lost its bargaining power” with the international lender. From the time the government reluctantly agreed to go in for an IMF programme, some in Sri Lanka have been flagging the potential impact of IMF conditionalities on ordinary people, including possible tax hikes across the board, austerity-driven cuts in state spending, and a push towards privatising loss-making State-owned enterprises.

“This IMF programme is likely to be as consequential as in 1977-78, when Sri Lanka went through an IMF structural adjustment programme, as it became the first country to liberalise its economy in South Asia. It could mean a full-blown assault on what remains of our social welfare system, dispossessing our working people and jeopardising our legacy of high levels of human development,” Kadirgamar contended.