Jorgelina do Rosario and Uditha Jasinghe

COLOMBO/LONDON – The Sri Lankan central bank stated Tuesday that it is now “complicating and impossible” for the country to pay its external debt. This comes as it tries using its diminishing foreign currency reserves to buy fuel.

Reserves of this island nation fell by over two-thirds during the past two year. The country’s tourism-dependent economy was badly affected by tax cuts, and COVID-19 has exposed its debt-fueled spending.

For more than one month, street protests have continued against the shortages in fuel, electricity, food, and medicine.

P. Nandalal Weerasinghe (Central Bank of Sri Lanka governor) stated that we should focus on imports essential and not worry about external debt.

It has reached a point where it is difficult and even impossible to make debt payments.

Weerasinghe stated that the payment suspension would occur until the country reached an agreement with creditors, and the International Monetary Fund (IMF) supports the loan program. Sri Lanka begins formal discussions with the global lender Monday to obtain emergency loans.

Foreign debt payments totaling approximately $4 billion are due by the country, with a $1B international sovereign bond maturing this July. There is an $78 million coupon due on two bonds that will mature in 2023, 2028 and 2028. The grace period is 30 days.

“It’s a default. It was inevitable,” Murtaza Jafferjee said, chief executive of J.B Securities.

This is good news for the economy, as we used scarce foreign currency resources to pay our debts. We couldn’t afford it. This will free up funds to support our citizens. It was replaced by vanity at the expense of our people.”

He said Sri Lanka’s decision covers about $25 billion in bilateral and commercial debt, which includes about $12 billion of international sovereign bonds.

Milo Gunasinghe from JPMorgan, NYSE:, stated that “The memorandum of today should pave our way to an IMF programme, in our opinion,” but warned that the level of political uncertainty remained high.

Gunasinghe stated that formal negotiations might not begin until appointments with creditors have been made since the government has only started the selection process for advisers to debt talks this weekend.

Timothy Ash (BlueBay Asset Management Senior Emerging Markets Strategist), stated that there was no surprise in the fact that Colombo administration took so much time to adjust to the facts on the ground.

He said, “It is logical to declare an payment moratorium until they negotiate a program with the IMF or agree terms with bondholders.”

Tradeweb data indicated that Sri Lanka’s sovereign-dollar-denominated bond portfolio enjoyed strong gains on Tuesday. Many issues were up almost 2 cents to the dollar.

Most of its hard currency bond trade at below 40c per dollar, while the July 25th maturity bond traded at over 50c last year according to data from Refinitiv.

The call for repayment by Governor Weerasinghe was made in good faith. He stressed that 22 million people have never fallen behind on their debt payments.