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Monday June 27th, 2022

Sri Lanka halts foreign debt repayments in ‘pre-emptive negotiated default’

ECONOMYNEXT – Sri Lanka will suspend repayments of foreign debt of the government and public sector agences period pending an orderly restructuring of debt, Treasury Secretary Mahinda Siriwardena said.

Sri Lanka is entering into a ‘pre-emptive negotiated default’ by giving notice ahead of time and asking lenders to come to the negotiating table, which is not a ‘hard default’ Central Bank Governor Nandalal Weerasinghe said.

“We announce before hand that we are not in a position to pay and come to the negotiating table,” he said.

Sri Lanka had about 12.55 billion US dollars of international sovereign bonds in a total of about 32 billion US dollars of government external debt. There are also some external debt of state enterprises which are guaranteed by the government.

Investors were asked to capitalize interest payments until negotiations started in a notice issued by the government.

Sri Lanka would issued a short term security for each delayed payment. Interest would accrue at the rate of the original debt.

If the investor wants they can get repaid in rupees.

On April 18, Sr Lanka has to pay coupons on sovereign bonds.

Interest payments would be capitalized and added to the principal.

The suspension would apply to International Sovereign Bonds.

Bilateral (government-to-government) credits.

All loans from commercial banks or institutional lenders, including foreign state agencies.

All government guaranteed debt.

Swap lines between the central bank and foreign central banks would be excluded.

Local law dollar bonds (Sri Lanka Development Bonds) are excluded.


Sri Lanka Development Bonds excluded from re-structuring

Sri Lanka was negotiating a programs with the IMF and bilateral support was also expected.

The IMF program would move in parallel.

Download the government document ; Interim Policy Regarding the Servicing of Sri Lanka’s External Public Debt

The affected debt would be principal and interest falling due after 1700 hours, April 12 Sri Lanka time.

Governor Weerasignhe said more inflows could now be used for essential imports.

Sri Lanka has faced forex shortages due to money printed to enforce low interest rates. Governor Weerasinghe has already hiked the policy rate 700 basis points to 14.50 percent.

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