Faced with an unprecedented economic crisis, Sri Lanka on Tuesday announced it will suspend repayment of all its foreign debt obligations as it negotiates a debt restructuring plan with the International Monetary Fund (IMF). Since its independence in 1948, the country so far had a clean record in debt servicing.

Currently, the island country has over $51 billion in debt, with the $7 billion alone scheduled for repayment this year, while its total foreign exchange reserves stood at $1.93 billion by March. The authorities have been struggling to pay for essentials like fuel, food, and other supplies.

The government, in a detailed statement, released on Tuesday by the Ministry of Finance, said,  “Recent events, however, including the effects of the COVID-19 pandemic and the fallout from the hostilities in Ukraine, have so eroded Sri Lanka’s fiscal position that continued normal servicing of external public debt obligations has become impossible.”

The IMF, the ministry said, has assessed Sri Lanka’s foreign debt as unsustainable, and staying current on foreign debt repayment is no longer a tenable policy. Apart from the IMF, Colombo has sought assistance from India and China.

“The government intends to pursue its discussions with the IMF as expeditiously as possible with a view to formulating and presenting to the country’s creditors a comprehensive plan for restoring Sri Lanka’s external public debt to a fully sustainable position,” the ministry said.

Central Bank head P Nandlal Weerasinghe has said the country 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."

On the political front, the government is also struggling to create political consensus with political parties for the formation of a unity government, as the protests continue, demanding the resignation of the Rajapaksas brothers.

Mahinda Rajapaksa, the country’s prime minister, assured the country on Monday that the government will not open initiate an enormous program to address the situation. 

India, one of its closest allies, has so far extended assistance worth $2.4 billion, including several lines of credit for the purchase of fuel, and other essential supplies. On Tuesday, New Delhi also supplied 11,000 metric tonnes of rice purchased under the $1 billion line of credit that it had issued last month. 

(SAM)