Crisis-hit Sri Lanka braces for default as dollars run out

Sri Lanka is set to default on its external debt as the grace period for missed payments expires on Wednesday, with the government racing to secure dollars to top up depleted fuel supplies.

The country said last month it would stop repaying its international debt due to an economic and balance-of-payments crisis that has left it in effect without foreign exchange reserves. It does not have a fully functioning government after President Gotabaya Rajapaksa’s cabinet resigned last week.

Sri Lankans are suffering from severe shortages of fuel, food and medicine, with power cuts lasting several hours and queues for petrol and diesel. A protest movement called on Rajapaksa to stand down.

Sri Lanka, Asia’s largest issuer of high-yield bonds and an enthusiastic participant in Beijing’s Belt and Road international infrastructure program, owes a total of more than $50 billion to private bondholders and to countries like China, India and Japan.

The grace period for interest payments on two $1.25 billion international sovereign bonds maturing in 2023 and 2028 will end on Wednesday, triggering cross-default clauses that could bring much of the total debt due before Colombo does not start formal restructuring talks.

“We defaulted with the idea that we were going to start a restructuring process,” said debt restructuring lawyer Manjuka Fernandopulle. “And it doesn’t seem to be moving anywhere. . . The wardrobe is not there. The urgency of initiating a restructuring process has taken a back seat.

Sri Lanka has started talks with the IMF and bilateral creditors for emergency loans to ease the shortages, but the government has yet to appoint a finance minister.

Prime Minister Ranil Wickremesinghe, an unpopular veteran chief who was appointed last week by his longtime rival Rajapaksa, said on Monday the island was struggling to find dollars to replenish its dwindling fuel supplies.

“It’s a challenge for the Treasury to come up with $1 million,” he said in a televised address. “The next two months will be the most difficult of our lives. We must be prepared to make sacrifices.

Sri Lanka became a popular destination for bondholders seeking high-yield investment opportunities after its civil war ended in 2009, when the ruling Rajapaksa family used back-to-back infrastructure projects debt to fuel growth.

The island, which has never missed debt payments, joins countries like Zambia and Ecuador in default as the coronavirus pandemic has taken its toll.

But aside from Covid-19, analysts blamed mismanagement by Rajapaksa, which cut taxes and imposed a ban on chemical fertilizers that hurt agricultural production. The fall in tourism during the Covid crisis has only made matters worse.

Anger towards Rajapaksa boiled over last week when attacks on protesters by pro-government mobs sparked a wave of retaliatory violence, forcing the resignation of Rajapaksa’s once-powerful brother Mahinda Rajapaksa as prime minister and prompting the president to deploy the army to impose a curfew.

Several countries, including the UK, have issued advisories warning against all but essential travel to the island, further curbing tourist flows.

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