Sri Lanka halts foreign debt payment

The economic crisis in Sri Lanka has reached its nadir. The Central Bank of Sri Lanka Governor P Nandalal Weerasinghe told reporters on Tuesday, “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.” Sri Lanka’s foreign reserves stood at $1.93 billion, while its debt payments due this year are $4 billion, including $1 billion international sovereign fund maturing in July.

The governor assured, “This will be on a temporary basis until we come to an agreement with the creditors and with the support of a programme with the IMF (International Monetary Fund).” He also said that the focus must be on essential imports and not on servicing external debt. According to J.P. Morgan analysts, the debt service amounts to $7 billion in 2022 and with a $3 billion current account deficit. The current account deficit means that the imports will be much larger than exports, and the difference amounts to $3 billion. According to Blue Bay Management’s Timothy Ash, “the only surprise is that it took the administration in Colombo so long to come to terms with the reality on the ground.” He said “It’s logical to declare payment moratorium until they work out a programme with the IMF and agree terms with bondholders.”

It is not yet clear how Sri Lanka had landed in this kind of an acute economic crisis. The political leadership of President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa is with its back to the wall, as angry protests break out in the streets and political allies of the ruling alliance have walked away. President Gotabaya Rajapaksa imposed emergency in the face of violent protests and then withdrew the emergency proclamation. It must have become clear to the president that emergency is not the solution to the crisis, which is mainly economic in nature. There is inflation, shortage of fuel, food and medicines and there is not enough foreign exchange to buy for the essential imports. Sri Lanka has turned to India and China for financial help, as well as to the IMF. Critics say that the Rajapaksa government had tried to resist approaching the IMF till it was too late. The Central Bank governor said that talks with IMF will begin next week.

Prime Minister Mahinda Rajapaksa in a televised address appealed for peace, and said, “The president and I are spending every moment to formulate solutions on how to get Sri Lanka out of the current crisis.” But the people seem to have lost trust in the Rajapaksa brothers.

And there is a demand for change in the leadership of the country. President Gotabaya Rajapaksa wanted to form a national government of all parties, but the opposition rejected the idea. Udaya Gammanpila, chief of the Jathika Hela Urumaya party said, “The main proposal is to have an all-party committee to make key decisions and the appointment of a new prime minister and a limited cabinet.” He said that this has to be done before new elections are called, and emphasised, “We have to reverse shortages and stabilise the economy.”

If the financial and political situation is grim, the situation on the ground is worse. The doctors are complaining that they do not have the tubes to provide for new-born babies to breathe, and they cannot perform heart surgeries because the components are not available. And due to power shortages, doctors and nurses are attending to emergencies in the countryside in the dark. The next parliamentary elections are due in 2025. It is surprising that after winning two-thirds majority in the election 2020, the Rajapaksas should have lost ground so soon and so precipitously.