Sri Lanka decides to default on debt repayment

Sri Lanka has decided to temporarily default on its debt repayment pending a restructuring of those obligations consistent with an economic adjustment program supported by the International Monetary Fund (IMF).

The Finance Ministry said that?Sri Lanka has had an unblemished record of external debt service since independence in 1948. 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.

Late last month, the IMF assessed Sri Lanka’s debt stock as unsustainable. Although the Government has taken extraordinary steps in an effort to remain current on all of its external indebtedness, it is now clear that this is no longer a tenable policy and that a comprehensive restructuring of these obligations will be required.

Confronted by this hard reality, the Government has approached the IMF for assistance in designing an economic recovery program and for emergency financial assistance. The Government is also seeking financial help from its other multilateral and bilateral partners in order to alleviate the suffering that this extraordinary situation has imposed on the citizens of Sri Lanka. 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 Finance Ministry said that it shall therefore be the policy of the Sri Lankan Government to suspend normal debt servicing of all affected debts, for an interim period pending an orderly and consensual restructuring of those obligations in a manner consistent with an economic adjustment program supported by the IMF. The policy of the Government will apply to amounts of affected debts outstanding on April 12, 2022. New credit facilities, and any amounts disbursed under existing credit facilities, after that date are not subject to this policy and shall be serviced normally.

The holders of all affected debts are being requested to capitalize any amounts of principal or interest falling due during this interim period, at an interest rate not higher than the normal contractual rate applicable to that credit, until a restructuring proposal can be presented to the creditors for their consideration.

The Finance Ministry said that it will stand ready to execute a short-form instrument confirming the capitalization of maturing amounts for creditors that may require such documentation for regulatory or accounting purposes.

The holder of an affected debt that wishes to receive the Sri Lankan Rupee equivalent of an amount falling due during the interim period in lieu of the capitalization of that amount, should contact the Ministry as soon as practicable, but not later than one month from the day on which such amount fell due.

The Ministry said it will attempt to accommodate such requests provided that doing so (i) is
consistent with the Central Bank’s monetary policy and (ii) is feasible under the relevant credit documentation.

The Government says it is taking the emergency measures only as a last resort in order to prevent a further deterioration of Sri Lanka’s financial position and to ensure fair and equitable treatment of all creditors? commercial and bilateral ? in the comprehensive debt restructuring that now seems inescapable. (Colombo Gazette)