Sri Lanka announces default on all its $51 billion external debt: What does this mean?

Sri Lanka has announced default on all its external debt worth $51 billion, calling the move a "last resort" after running out of foreign exchange to import essential goods. 

Created On: Apr 12, 2022 15:31 IST
Sri Lankan President Gotabaya Rajapaksa
Sri Lankan President Gotabaya Rajapaksa

Sri Lanka , which is currently grappling with its worst economic crisis, announced default on all its external debt worth $51 billion, on April 12, 2022. The Island nation called the move a "last resort" after running out of foreign exchange to import desperately needed goods.

The Finance Ministry stated that the immediate debt default was to ensure "fair and equitable treatment of all creditors" ahead of an International Monetary Fund assisted recovery programme for the island nation. 

Sri Lanka is facing an acute shortage of fuel and food, leading to daily record-long blackouts, forcing the citizens to turn to candles for daily activities. The 22 million residents of the country have been facing weeks of power blackouts and severe shortages of food, fuel and even life-saving medicines.

The crisis has compelled citizens to take to the streets, with crowds of people attempting to storm the homes of government leaders and public buildings, demanding for the government to resign. 

What is External Debt?

Sri Lanka's Finance Ministry explained in its statement that external debt here refers to obligations towards borrowed money of deferred purchase of goods and services denominated in a currency other than Sri Lankan Rupees and governed by a law other than the law of Sri Lanka.

Sri Lanka's Finance Ministry Statement on Defaulting of External Debt: Know in 10 Points

1. The Sri Lankan government has decided to suspend normal debt services of all affected debts for an interim period. The government's debt policy shall apply to the amounts of affected debts outstanding on April 12, 2022. 

2. The new credit facilities and any amounts dispursed under existing credit facilities after that date will not be subject to the policy and shall be serviced normally. 

3. The Sri Lankan government has requested holders of all affected debts to capitalise any amount of principal or interest falling due during this interim period at an interest rate not higher than the normal contractural rate applicable to that credit until a restructuring proposal can be presented to the creditors. 

4. All principal and interest payments falling due after 5 pm (Sri Lankan local time) on April 12th under the affected debts shall be deemed to have been capitalised, added to the outstanding principal of the relevant debt. 

5. Such amounts shall bear interest during the interim period at the normal contractual rate applicable to that credit. 

6. The Sri Lankan finance ministry shall send a written confirmation of the new principal amount of the affected debt as shown on the ministry records to the creditor after the scheduled due date for each amount affected by the policy. 

7. The Ministry will also be ready to execute a short-form instrument confirming capitalising of maturing amounts as described for creditors that may require such documentation for regulatory purposes. 

8. All creditors of the affected debt who wish to receive payback in Sri Lankan rupees can contact the Finance Ministry not later than one month from the day on which the amount fell due. 

9. The Finance Ministry shall attempt to accommodate such requests provided it is consistent with the central bank's monetary policy and is feasible under the relevant credit documentation. 

10. The debt policy shall apply to the following categories of external public debts of Sri Lanka- 

-All outstanding bonds issued in International Capital Markets.

-All bilateral credits between governments excluding the swap lines between Sri Lankan central bank and foreign central bank.

-All foreign current denominated loan agreements or credit facilities with commercial banks of institutional lenders for which the government or public sector entity in the obligator or guarantor. 

-All amounts payable by the government or public sector entity.

Read Full Statement by Sri Lankan Finance Ministry Below-

Background

The Sri Lankan Government has approached the International Monetary Fund for assistance in designing an economic recovery programme and for emergency financial 

assistance. The nation has also sought financial help from other multilateral and bilateral partners to alleviate the economic crisis. 

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