Sri Lanka is defaulting on foreign debt in the midst of economic and humanitarian crisis

COLOMBO, Sri Lanka – Sri Lanka announced on Tuesday that it would suspend payments on its foreign debt, a move that underscores the crisis facing a government struggling to curb rising inflation, large-scale protests and a potentially looming humanitarian crisis. disaster on an island of 22 million people.

Although the announcement marks Sri Lanka’s first standard since its independence in 1948, the movement has been increasingly expected by international markets, especially in recent months as the country struggled to import fuel, food and even medicine as its foreign exchange reserves fell. From the coastal capital of Colombo to the central highlands, tens of thousands of angry protesters have taken to the streets for weeks to demand the departure of President Gotabaya Rajapaksa, whose family has maintained an iron grip on the island’s politics for most of the past. decade.

The Rajapaksa government – led by Gotabaya Rajapaksa and his brother, Prime Minister Mahinda Rajapaksa – is seeking a rescue operation from the International Monetary Fund at a meeting in Washington scheduled for next week. Its economic team, which was recently switched under increasing public pressure, has said it is taking steps, including raising interest rates and devaluing the Sri Lankan rupee, to convince international creditors that Sri Lanka will be able to resume payments. , if they are given time to limit the economic meltdown.

Sri Lanka’s external debt amounts to $ 51 billion and it has about $ 7 billion in payments this year. Many international economists, including those at the IMF, have called on Sri Lanka to negotiate with its creditors – including the Asian Development Bank, Japan, China and private owners such as BlackRock – to suspend payments and prioritize stabilizing the country.

“The effects of the Covid-19 pandemic and the fallout from hostilities in Ukraine have eroded Sri Lanka’s fiscal stance so much that continued normal service commitments have become impossible,” the Finance Ministry said in a statement. “The government has taken extraordinary steps in an attempt to avoid resorting to these measures, but it is now clear that any further delay risks inflicting permanent damage on Sri Lanka’s economy.”

Murtaza Jafferjee, head of the independent Advocata think tank in Colombo, said the Rajapaksa government had been “in denial” for years when the country’s economy fell.

Rajapaksa announced steep tax cuts – a promise made during his 2019 campaign – while Sri Lanka’s trade deficit fell in recent years as tourism, a vital source of foreign exchange, evaporated during the coronavirus pandemic. As Sri Lanka’s dollar reserves dried up and inflation began to bite, residents have borne the bulk of a 30 percent increase in food prices and lines at gas stations that last for hours every day. In recent days, some officials have warned of the possibility of mass results.

The people of Sri Lanka “have made sacrifices until we ran out of reserves completely and had to do this,” Jafferjee said. “The people are in a terrible state.”

The only consolation, Jafferjee added, was that Rajapaksa recently installed “a more determined economic team that literally throws the kitchen sink after the problem.”

Rajapaksa, whose younger brother Basil previously served as finance minister, shook up his cabinet on April 4 and appointed three trained economists to an economics advisory team three days later. The government also recently announced steps such as sharp rate hikes and cuts in public spending.

In an interview before the standard announcement, Ali Sabry, the finance minister appointed by Rajapaksa on April 4 to replace his brother, said he did not believe that Sri Lanka would face mass shortages of food and medicine and that the government was in negotiations with multilateral institutions, including the World Health Organization, as well as neighboring countries such as India, on emergency supplies in the event of a crisis.

Sabry said he negotiated with international lenders and foreign governments to delay debt payments and offer material assistance in the event of food or medicine shortages, adding that he was convinced the country would not fall freely. “It is in no one’s interest that Sri Lanka’s situation worsens further,” he said.

Yet the government’s actions in recent days have not reassured opposition politicians, who are demanding that Rajapaksa’s presidential powers be revoked – or that he and his family members, who retain a majority of supporters in parliament, leave the political scene altogether. The deadlock has led to uncertainty about who can lead Sri Lanka in the future, which could worry international lenders at a time when Sri Lanka is seeking to project stability, political and economic observers say.

In a televised speech Monday night, Mahinda Rajapaksa, the country’s No. 2 leader, urged citizens to remain “patient” and said the Rajapaksa family was willing to “bear” the public outrage. Known as a strong man who, as president in 2009, ended a decades-long civil war by ruthlessly crushing an ethnic Tamil separatist movement, Mahinda Rajapaksa did not signal any intention to resign, but he sounded a tolerant tone when he promised he would did not crack down on protesters as long as they did not “harass” his security forces.

“Remember that today you are walking the streets without fear of oppression while protesting because these war heroes sacrificed their lives to save this country for you,” he said, urging citizens to go home. “Friends, every second you protest on the streets, our country loses opportunities to receive potential dollars.”

It is not clear whether his appeal will have an effect. For days, protesters have camped around the clock in front of the president’s office in central Colombo, singing and holding posters demanding that the Rajapaksa family “go home” and return money they have allegedly stolen to the people of Sri Lanka.

On Saturday, the waterfront swelled with mostly city professionals expressing their frustration. Among the protesters was Ray Anthony, 64, who said he barely managed to survive on $ 100 a month by serving tea at a technology company before losing his job last year.

As food prices have skyrocketed, he has given up the idea of ​​eating meat and coconuts. As fuel prices rose, he has given up cooking with gas and instead swallows for firewood.

“Before the crisis, I could cope,” he said. “Today I am lost.”

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