Sri Lanka has defaulted on its debt for the first time in its history as the country grapples with its worst financial crisis in more than 70 years.
It comes after a 30-day grace period to repay $78million (£63million) in unpaid interest payments that expired on Wednesday.
The Governor of the Reserve Bank of Sri Lanka said the country is now in a “preventive default”.
Defaults occur when governments are unable to make some or all of their debt payments to creditors.
It can damage a country’s reputation and make it more difficult to borrow the money it needs in international markets, further damaging confidence in its currency and economy.
Asked if the country is now in default, Central Bank Governor P Nandalal Weerasinghe said: “Our position is very clear, we have said we cannot pay until they come to restructuring. So that’s called preventive Original.
“There may be technical definitions… from their side, they can consider it a default. Our position is very clear, until there is a debt restructuring we cannot repay,” he added.
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Sri Lanka’s economy has been hit hard by the pandemic, soaring energy prices and populist tax cuts. A chronic shortage of foreign exchange and rising inflation had led to severe shortages of medicines, fuel and other necessities.
In recent weeks, the growing crisis has led to large, sometimes violent, protests against President Gotabaya Rajapaksa and his family.
The country has already started bailout talks with the International Monetary Fund and must renegotiate its debt arrangements with creditors.
The government has previously said it needs up to $4 billion this year.
Mr Weerasinghe also warned that Sri Lanka’s already very high inflation rate is likely to rise further.
“Inflation is obviously around 30%. She will be balanced [higher]headline inflation will increase by around 40% over the next few months,” he said.
He spoke after the Reserve Bank of Sri Lanka kept its two key interest rates steady after rising seven percentage points at their last meeting.
The country’s policy rate remained at 14.5% while the deposit rate was kept at 13.5%.
Last month, two of the world’s largest rating agencies warned Sri Lanka of a default.
Fitch Ratings downgraded its assessment of the South Asian nation, saying “a sovereign bankruptcy process has begun.”
S&P Global Ratings made a similar announcement, saying default is now a “virtual certainty.”
Credit ratings are designed to help investors understand the level of risk they are exposed to when purchasing a financial instrument, in this case a government bond or a country’s government bond.
After being contacted by the BBC on Thursday, major rating agencies Moody’s and Fitch said they had no new updates at this time.
S&P Global Ratings did not immediately respond to a request for comment from the BBC.
Last week, Mahinda, President Rajapaksa’s older brother, resigned as prime minister after clashes between government supporters and protesters. Nine people died and more than 300 were injured in the violence.
On Friday, Sri Lanka’s new Prime Minister Ranil Wickremesinghe told the BBC that the economic crisis “will get worse before it gets better”.
In his first interview since taking office, he also pledged to ensure families get three meals a day.
He appealed to the world for more financial help, saying: “There will be no hunger crisis, we will find food”.
- Sri Lanka is an island country off southern India: It gained independence from British rule in 1948. Three ethnic groups – Sinhalese, Tamils and Muslims – make up 99% of the country’s 22 million people.
- A family of brothers has dominated for years: Mahinda Rajapaksa became the hero of the Sinhalese majority in 2009 when his government defeated Tamil separatists after years of bitter and bloody civil war. His brother Gotabaya, who was defense minister at the time, is now president.
- Now an economic crisis has sparked anger on the streets: Rising inflation has left some food, medicine and fuel in short supply, power outages and ordinary people taking to the streets in anger, with many blaming the Rajapaksa family and their government for the situation.
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