Sri Lanka defaults on debt for first time in its 70-year history

Sri Lanka has defaulted on its debt for the first time in its history as the country struggles with its worst financial crisis in more than 70 years.

It comes after a 30-day grace period to come up with $78 million of unpaid debt interest payments expired on Wednesday (18 May), reports the BBC.

Sri Lankan Central Bank Governor P Nandalal Weerasinghe said the country was now in a "pre-emptive default".

Later on Thursday, two of the world's biggest credit rating agencies also said Sri Lanka had defaulted. Defaults happen when governments are unable to meet some or all of their debt payments to creditors.

"Our position is very clear, we said that until they come to the restructure [of our debts], we will not be able to pay. So that's what you call pre-emptive default. There can be technical definitions... from their side they can consider it a default. Our position is very clear, until there is a debt restructure, we cannot repay," P Nandalal Weerasinghe said. 

Sri Lanka is seeking to restructure debts of more than $50 billion it owes to foreign creditors, to make it more manageable to repay.

The country's economy has been hit hard by the pandemic, rising energy prices, and populist tax cuts. A chronic shortage of foreign currency and soaring inflation had led to a severe shortage of medicines, fuel and other essentials.

An economic crisis unprecedented in the country's history since independence in 1948 has led to a critical shortage of foreign exchange, that saw it miss two coupon payments on sovereign bonds on 18 April.

Sri Lanka has already said it is unable to make the coupon payments, and a 30-day grace period ends on Wednesday. Sri Lanka currently has no dollars to pay for petrol shipments, Power and Energy Minister Kanchana Wijesekera told parliament.

A petrol shipment has been at Colombo port since 28 March but the government has been unable pay, he added.

Sri Lankan Prime Minister Ranil Wickremesinghe said on Wednesday the country had secured $160 million in bridge financing from the World Bank, but it was not clear if the funds could be used for fuel payments.

"The statistics have gone haywire," he said. "But the reality is we don't even have $1 million." 

Massive protest outside Sri Lankan president's office as crisis worsens

Hit hard by the pandemic, rising oil prices and populist tax cuts, Sri Lanka's dire economic situation has led to spiralling inflation and shortages of essential supplies, bringing thousands of onto the streets in protest.

Violence between pro- and anti-government factions and police left nine dead and more than 300 injured last week, and was followed by the resignation of former prime minister Mahinda Rajapaksa.