Sri Lanka Stops Debt Payments, Effectively Defaulting

Sri Lanka suspended payments on its international debt Tuesday, effectively putting the small island nation in default as it plunges deeper into an economic crisis.

Rising food and fuel prices as well as a shortage of essential goods and medicine have forced tens of thousands of protesters onto the streets in recent weeks demanding the ouster of President Gotabaya Rajapaksa. The Rajapaksa family, with one brother serving as president and a second as prime minister, has called for patience, saying the government is seeking relief from neighbors and working with the International Monetary Fund to restructure the country’s debt.

“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,” the finance ministry said in a statement.

Sri Lanka’s foreign debt stands at about $50 billion, or about 60 percent of its economic output. This year the government has to pay about $7 billion to cover its debt payments, according to a presentation last month by a former chief of the Central Bank of Sri Lanka.

But money is running low. Sri Lanka closed its borders to tourists for nearly a year and a half during the coronavirus pandemic, depriving the nation of much-needed tourism revenue. The currency has also cratered, exacerbated by government missteps. Foreign reserves have plummeted to below $2 billion.

“It came to this because of the severe foreign exchange shortage,” said Anushka Wijesinha, an economist and a co-founder of the Center for a Smart Future in Colombo. “The math wouldn’t have added up.”

The lack of funds has meant the country is struggling to import fuel, food and other essential goods. Local food supplies have also been hurt by the country’s sudden shift to organic farming, which was reversed but not before it severely reduced harvests. The shortage of dollars to import fertilizer means the upcoming farming season could also be partly affected, analysts say.

Suspending international debt payments, Mr. Wijesinha said, will relieve pressure by freeing up foreign exchange to pay for some imported essentials, including food and medicine. “The reason for the current shortages is not because of a global shortage,” he said. “It is because we didn’t have the money to pay for things.”

How Sri Lanka recovers from this crisis will depend on whether serious economic reforms are undertaken, he added.

“We are going to really have to prove ourselves as a worthy creditor,” he said.