Sri Lanka has fallen into default for the first time in its history, as its economic crisis deepens and inflation surges higher.
Sri Lanka’s central bank confirmed today it had missed a deadline for $78m of foreign debt repayments on two sovereign bonds, as a 30-day grace period expired.
Spiralling food and fuel costs, shortages and rolling power blackouts have led to nationwide protests and a plunging currency, with Sri Lanka short of the foreign currency reserves it needed to pay for imports.
Last month, the government said it would halt payments on its foreign debt to preserve cash for essential goods, and seek a debt restucture.
This is Sri Lanka’s first sovereign debt default since it gained independence from Britain in 1948. According to Moody’s, it is the first sovereign default in the Asia-Pacific region this century.
On Monday, Sri Lanka’s new prime minister, Ranil Wickremesinghe, has warned that the financial crisis engulfing the country will get worse and “the next couple of months will be the most difficult ones of our lives”.
In his first address to the country on Monday, Wickremesinghe described the conditions of the country’s finances as “extremely precarious”.
“In November 2019, our foreign exchange reserves were at $7.5bn. However, today, it is a challenge for the Treasury to find $1m.”
Central bank governor Nandalal Weerasinghe predicted today that inflation could accelerate to 40% in coming months.
Many other low- and middle-income countries are struggling with a three-pronged crisis: the pandemic, the rising cost of their debt, and the increase in food and fuel prices caused by Russia’s invasion of neighbouring Ukraine.
Our economics editor Larry Elliott explained earlier this month that Sri Lanka is unlikely to be the last to buckle.