Sri Lanka’s preemptive default declaration has been made by Central Bank Governor Nandalal Weerasinghe without any cabinet or parliamentary approval which is a pre –requisite for a debt default as Parliament had already voted the necessary funds for debt servicing at the time of approving the Budget 2022, top level official sources said.
As a consequence of Sri Lanka’s debt default there is now an increasing likelihood of forex creditors calling for local debt also to be re-structured, since the major part of the Sri Lankan Government’s debt servicing is that of local debt.
Their contention may be that for “debt sustainability” to be achieved, a local debt re-structuring must also be carried out.
It is possible that the International Monetary Fund (IMF) may also agree with such a contention given their past record in responding to debt sustainability situations in other countries, these sources claimed.
The rejecting of domestic debt restructuring after declaring external debt default by the Central Bank Governor Weerasinghe without the prior approval of the Monetary Board, the Attorney General, the Cabinet of Ministers or the Parliament is beyond the control of the monetary authority, several legal experts said.
This situation has arisen mainly from the hasty and reckless decision to default on the sovereign forex debt, and thereby putting Sri Lanka into an almost irretrievable position of despair and hopelessness, they claimed.
Sri Lankans for the past months have been enduring shortages of fuel, food and other essentials and daily power outages. Most of those items are paid for in hard currency, but Sri Lanka is on the brink of bankruptcy, saddled with dwindling foreign reserves and $25 billion in foreign debt. Nearly $7 billion is due this year.
“Sri Lanka has had an unblemished record of external debt service since independence in 1948,” the Ministry of Finance said in a statement.
“However Sri Lanka’s fiscal position that continued normal servicing of external public debt obligations has become a difficult task but not impossible, official sources said.
Central Bank’s sudden declaration of pre-emptive negotiated default of external debt on April 12 this year made at a time where there was an expected forex inflow of over US $ 10.7 billion in the pipeline as at April 4 to boost foreign reserves.
Of the above pipeline, a sum of $ 4.5 billion was confirmed as being in the final stages by April 3 and a further amount of around $2.6 billion was very likely to materialise over the short term, he disclosed.
This forex receipts would have enabled the Government to settle the maturing payments due in 2022, while also rolling over several other existing loans, including Sri Lanka Development Bonds and Foreign Currency Banking Unit (FCBU) loans, he revealed.
This forex receipts would have enabled the Government to settle the maturing payments due in 2022, while also rolling over several other existing loans, including Sri Lanka Development Bonds and Foreign Currency Banking Unit (FCBU) loans, he revealed.
This irresponsible and illegal decision of pre-emptive default plunged Sri Lanka into a serious abyss of economic and financial isolation as a “bankrupt” nation, with the consequential severely damaging repercussions due to haunt the nation for many years to come, several economic experts warned.
Based on that announcement of pre-emptive negotiated default of external debt by the Central Bank, the International Ratings Agencies have also placed Sri Lanka’s sovereign debt rating at a default status, while also downgrading all Sri Lankan banks, further aggravating the situation.
Global ratings agency S and P Global on Monday 15 slashed its rating on Sri Lankan bonds to ‘D’, representing default, following missed interest and principal payments.
The country which had defaulted on a bond payment earlier this year and has $12 billion in overseas debt with private creditors has been battling the worst financial crisis in its 74 year history of independence.
The ratings agency affirmed its ‘SD’ long-term and ‘SD’ short-term foreign currency sovereign ratings on Sri Lanka, as well as reiterated the outlook for the island nation at ‘negative’.
Without taking action to manage forex debt servicing of $244 million in April 2022 using available forex inflows, the Central bank has suspended repayment of $ 789 million for May and June dragging the country into debt default abyss, an eminent economist said.
He stated that when a sovereign forex loan is not repaid, the credibility of the country will be lost, and investors will avoid that country.
It will be very difficult for the defaulting country to obtain new forex loans thereafter. The access to International Bond Markets may be lost for at least 5 to 10 years after the default.
The country’s banking system will be placed under a lot of pressure and face very serious difficulties when opening letters of credit and carrying out forex transactions, he pointed out
