Sri Lanka Enters Default... Unable to Pay Interest Even During Grace Period

[Image source=Yonhap News]

[Asia Economy Reporter Jeon Jinyoung] Sri Lanka is entering its first official debt default since gaining independence from the United Kingdom in 1948.

According to foreign media including Bloomberg on the 19th (local time), the grace period for payment of $78 million (approximately 100 billion KRW) in Sri Lankan government bond interest expired the previous day.

The Sri Lankan government is also reported to have failed to repay $105 million (approximately 134 billion KRW) in China-related debt.

Foreign media described the situation as "Sri Lanka has officially entered default."

International credit rating agency Standard & Poor's (S&P) downgraded Sri Lanka's sovereign credit rating from 'CC' to 'Selective Default' (SD) at the end of last month following the missed bond interest payment.

Sri Lanka's external debt is known to amount to about $51 billion (approximately 65.2 trillion KRW). According to analyses by JP Morgan Chase and others, Sri Lanka must repay about $7 billion (approximately 8.95 trillion KRW) in external debt this year, and about $25 billion (approximately 32 trillion KRW) over the next five years.

However, Sri Lanka effectively has no foreign exchange reserves left to pay the interest. On the 4th, Ali Sabry, Sri Lanka's Finance Minister, stated in parliament, "Available foreign exchange reserves are less than $50 million (approximately 6.4 billion KRW)."

Sri Lanka is facing an economic crisis due to the collapse of its tourism industry, a sharp increase in external debt from the China-led Belt and Road Initiative projects, and compounded fiscal policy failures.

The Sri Lankan side described this as a "preemptive default." On the same day, Nandalal Weerasinghe, Governor of the Central Bank of Sri Lanka, said, "While outsiders may see this as a default, other technical definitions are possible," indicating that they had preemptively informed that debt payments could not be made until debt restructuring is prepared.

He added, "The debt restructuring plan is nearly finalized and will soon be submitted to the cabinet."