Investment

Sri Lanka unilaterally suspends external debt payments, saying it needs money for essentials

COLOMBO/LONDON, April 12 (Reuters)-Sri Lanka’s central bank said Tuesday it had become “challenging and impossible” to repay its external debt, as it tried to use its dwindling foreign exchange reserves to import foreign currency. essentials like fuel.

The nation’s island reserves have fallen more than two-thirds in the past two years, as tax cuts and the COVID-19 pandemic have severely damaged the tourism-dependent economy and exposed government spending caused. of debt.

Street protests against shortages of fuel, electricity, food and medicine have been going on for more than a month.

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“We need to focus on essential imports and not have to worry about servicing the external debt,” the governor of the Central Bank of Sri Lanka, P. Nandalal Weerasinghe, told reporters.

“It has come to the point that debt repayment is difficult and impossible.”

Weerasinghe said the payment suspension is until the country reaches an agreement with lenders and in support of a loan program with the International Monetary Fund (IMF). Sri Lanka began formal talks with the global lender on Monday for emergency loans.

The country has foreign debt payments of approximately $ 4 billion due this year, including a $ 1 billion international sovereign bond that will expire in July. The $ 78 million coupon payment is due on two of its bonds that end in 2023 and 2028 on Monday, though there is a 30-day grace period.

“It’s a default. It’s inevitable,” said Murtaza Jafferjee, chief executive of brokerage JB Securities.

“This is a positive for the economy because we use very little foreign exchange resources to pay off our debt when we can’t afford to pay it. It will release funds for our own citizens. It has lost value in the amount of our population. “

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

“Today’s memorandum should give way to an IMF program, in our view,” Milo Gunasinghe told JPMorgan in a note to clients, though warned that political uncertainty remained high.

With the government just beginning the process of selecting advisers for debt negotiations over the weekend, formal negotiations with lenders can only begin once appointments have been made, Gunasinghe added.

BlueBay Asset Management’s senior emerging markets sovereign strategist, Timothy Ash, said “the only surprise was that the administration in Colombo took so long to address the reality on the ground”.

“It is logical to declare a moratorium on payments until they make a program with the IMF and agree on terms with bond holders,” he said.

Sri Lanka’s sovereign dollar-denominated bonds enjoyed healthy gains on Tuesday, with many issues rising nearly 2 cents to the dollar, Tradeweb data showed.

Its hard currency bonds typically trade at deep distress levels of less than 40 cents on the dollar while the bond that matured on July 25 was last traded at just over 50 cents, according to Refinitiv data. .

Governor Weerasinghe said the call for repayment was made in good faith, stressing that the country of 22 million people has never defaulted on its debt payments.

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Writing by Devjyot Ghoshal and Krishna N. Das; Edited by Ed Osmond, Raju Gopalakrishnan and Nick Zieminski

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