Sri Lanka opts for pre-emptive debt default to combat crisis

The decision comes on the heels of two other key policy changes.

Sri Lanka on Tuesday announced a pre-emptive default on all its foreign debt totalling $ 51 billion as a “last resort” while the island nation struggles to cope with a grave economic crisis.

The Government is taking the “emergency measures”, pending full discussions with the International Monetary Fund (IMF) from whom it has sought help, only to prevent a further deterioration of the country’s financial position, the Finance Ministry said. A comprehensive debt restructuring programme was now “inescapable”, it noted in a statement.

The decision comes on the heels of two other key policy changes. Sri Lanka floated the rupee early March, allowing for a stark depreciation of its value — it was nearly 320 against a US dollar on Tuesday. More recently, the Central Bank increased interest rates by 7 % in a bid to tighten monetary policy, apparently in preparation of an IMF package that the government wants to “expedite”.

“The question now is how ISB holders view this decision,” opposition lawmaker and economist Harsha De Silva told The Hindu. He was referring to International Sovereign Bonds or market borrowings that form the biggest chunk, or nearly half, of Sri Lanka’s foreign debt.  “The government should have ideally sought their consent instead of going in for a unilateral, hard default like this. They have really run out of money,” he said. The opposition United National Party has called for “a full explanation” in Parliament, of what led to “this situation” when the legislature convenes on April 19.

Commenting on Tuesday’s default announcement, economist Anush Wijesinha said in a tweet: “While this is in effect a form of default, it is better than a scenario where GoSL simply fails to make a particular coupon or bond payment coming due (several coming in the next weeks and months); MoF has taken a “policy stance” applicable for all; and attempts to build goodwill.”

Ahilan Kadirgamar, political economist at the University of Jaffna, said the government resorting to a default even before commencing negotiations with the IMF meant that “Sri Lanka has completely lost its bargaining power” with the international lender.