SL Suspends Servicing of Foreign Debt for an interim period

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By Rajiesh Seetharam

The Ministry of Finance has announced that Sri Lanka would suspend servicing all foreign debts effective from 5 p.m. on 12 April 2022 for an interim period. This will include outstanding international sovereign bonds, bilateral credits, excluding swaps between the Central Bank of Sri Lanka and foreign Central Banks, all foreign currency loans guaranteed by the Government or public sector entity. 

However, new credit facilities and any new amounts disbursed under existing facilities after 12 April would not be subject to this policy and will be serviced normally, the Ministry added. 

A statement from the Finance Ministry said that the Government has approached the IMF for assistance in its economic recovery programme.  

“It shall therefore suspend debt servicing for an interim period pending an orderly and consensual restructuring that will take place in a manner consistent with an economic adjustment programme supported by the International Monetary Fund (IMF),” the Finance Ministry statement said. 

It further noted that the holder of an affected debt, who wishes to receive the equivalent amount of Sri Lankan rupees, could contact the Finance Ministry, which would consider requests for paying in Sri Lankan rupees based on the Central Bank’s monetary policy, and the credit documentation of the debt. 

It has to be noted that by the end of August 2021, the total outstanding external debt of the Central Government stood at USD 33.9 billion. Sri Lanka has over USD 4 billion outstanding in foreign debt to service this year, including a USD one billion maturing internal sovereign bond payment in July. 

It has to be noted that Sri Lanka has a track record of never defaulting on its external debt. In late 2019, the new Government, which came to power a few months after the tragic Easter Sunday blasts, cut many taxes including VAT from 15% to 8% to boost economic activities. Subsequent to the Government’s tax cuts, Sri Lanka lost access to international capital markets as credit ratings agencies downgraded Sri Lanka’s ratings. Things became worse with the Covid pandemic, as Sri Lanka lost its USD 4 billion tourism revenue. Despite, several economists calling for the suspension of existing debt till a debt restructuring programme is planned, the CBSL continued servicing its foreign debts. Sri Lanka’s external reserves dwindled from USD 7.5 billion in November 2019 to USD 1.94 billion at the end of March 2022. 

Following massive public protests, the former CBSL Governor resigned last week. CBSL under new Governor Dr. Nandalal Weerasinghe raised rates by 700 basis points to encourage investments in rupee bonds, and reduce money printing. High level committee headed by Finance Minister Ali Sabry would be heading to Washington to negotiate an IMF programme. At this juncture, the Finance Ministry announced that it had suspended the external debt for an interim period, is seen as the most required measure by many economists.