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Sri Lanka Defaults on Foreign Debt to Save Money for Essential Goods

Sri Lanka Defaults on Foreign Debt to Save Money for Essential Goods

Sri Lanka on Tuesday announced plans to temporarily default on its foreign debt, calling the measure a “last resort” designed to prevent “permanent damage” to the island nation’s economy amid its worst fiscal crisis in more than 70 years. “Recent events ... have eroded Sri Lanka’s fiscal position that continued normal servicing of external public debt obligations has become impossible,” Sri Lanka’s Finance Ministry announced in a statement posted by the Sri Lankan Treasury’s official website on April 12. “It shall therefore be the policy of the Sri Lankan government to suspend normal debt servicing of all affected debts ... for an interim period,” the memorandum read. Sri Lanka’s Finance Ministry said it had approached the International Monetary Fund (IMF) for guidance in “designing an economic recovery program” that Colombo hopes to follow in the aftermath of its default on foreign debt. Sri Lanka’s Treasury said it had additionally requested “emergency financial assistance” from the IMF and other “multilateral and bilateral partners” in recent days. A protester throws an object at a bus next to a burning police car during a demonstration outside the Sri Lankan president’s home to call for his resignation in Colombo on March 31, 2022. Security forces were deployed across the Sri Lankan capital on April 1 after protesters tried to storm the president’s home in anger at the nation’s worst economic crisis since independence. (Photo by Ishara S. KODIKARA / AFP) “Sri Lanka had $78m (£60m) in international sovereign bond payments due next week,” the BBC observed on April 12. “Sri Lanka’s foreign reserves stood at $1.93bn at the end of March. However, it has around $4bn in foreign debt payments due this year,” according to the British broadcaster. Sri Lanka has weathered a rough financial storm in recent months as its central bank became deficient in foreign currency reserves.

The development, caused in part by the Chinese coronavirus pandemic, meant Sri Lankan traders were unable to pay for essential good imports upon which the island nation relies. Shortages of food, fuel, and medicines have frustrated Sri Lankans since early March.

The situation grew dire in mid-March and caused widespread unrest that spurred an anti-government movement. Sri Lankans who hold the nation’s federal government responsible for the financial downturn successfully pressured nearly all of Sri Lanka’s Cabinet to step down on April 3. Sri Lankan President Gotabaya Rajapaksa and his brother, Prime Minister Mahinda Rajapaksa, remain in office as the only two government officials to defy public pressure to resign on April 3. Protests calling for Gotabaya’s ouster continued in Colombo, Sri Lanka’s national capital, on April 11. Sri Lankan Central Bank Governor Nandalal Weerasinghe told reporters on April 12 Colombo’s decision to default on its foreign debt earlier that same day was directly tied to the nation’s shortages of vital goods. “The Central Bank Governor further pointed out that the scarce foreign currency reserve should NOT be used to service debt, adding that it should instead be used to purchase other essential items,” Sri Lanka’s News First website reported on April Tuesday.

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