Sri Lanka to temporarily halt foreign debt payments to avoid a hard default

Country's central bank governor says the action is being taken in good faith, and nation has never defaulted on its debt payments

Newly appointed governor of Sri Lanka's central bank Nandalal Weerasinghe says making debt payments has become challenging and impossible. AP

Sri Lanka will temporarily suspend foreign debt payments to avoid a hard default, the central bank governor said on Tuesday, with its limited foreign reserves required for imports of essential items such as fuel.

"It has come to a point that making debt payments are challenging and impossible. The best action that can be taken is to restructure debt and avoid a hard default," Governor P Nandalal Weerasinghe said.

Sri Lanka is due to start talks with the International Monetary Fund on a loan programme next week, with the country suffering from prolonged power cuts alongside shortages of food and medicines.

The island nation's foreign reserves stood at a paltry $1.93 billion at the end of March, with foreign debt payments of around $4bn due this year, including a $1bn international sovereign bond maturing in July.

The governor said the action was being taken in good faith, emphasising that the country of 22 million people had never defaulted on its debt payments.

"This will be on a temporary basis until we come to an agreement with creditors and with the support of a programme with the IMF," said Mr Weerasinghe, who took office last week amid growing public unrest triggered by the economic crisis.

"We need to focus on essential imports and not have to worry about servicing external debt," he said.

JP Morgan analysts estimate Sri Lanka's gross debt servicing would amount to $7bn in 2022 and a current account deficit of around $3bn.

Catholic priests and sisters hold placards during a demonstration against the economic crisis in Colombo, the capital of Sri Lanka. All photos: AFP

Catholic priests and sisters hold placards during a demonstration against the economic crisis in Colombo.

Protesters lash out after a surge of prices and a shortage of fuel and other essential commodities outside the president's office in Colombo.

All 26 Cabinet ministers resigned after thousands defied a national state of emergency and curfew, and joined street protests denouncing the government.

The curfew has been lifted but the president and his elder brother Prime Minister Mahinda Rajapaksa continue to hold on to power.

Sri Lankans have endured long queues to buy fuel, cooking gas, foods and medicine, most of which come from abroad and are paid for in hard currency.

The fuel shortage has caused rolling power cuts lasting several hours a day.

The extent of the crisis became clear when Sri Lanka could not pay for imports of basic supplies because of its mounting debts and dwindling foreign reserves.

Sri Lanka’s usable foreign reserves reportedly amount to be less than $400 million, yet it is saddled with about $7 billion in foreign debt obligations for this year.

Police used water cannon to disperse angry protesters who marched toward the Rajapaksa family home in southern Sri Lanka, demanding that they quit.

The president had appealed to people to limit their use of power and ‘extend their support to the country’ but the crisis has intensified since the main opposition party rejected his call to form a unity government. Reuters