Sri Lanka stops foreign debt payments pending IMF bailout talks

(DW) -Sri Lanka will temporarily halt foreign debt payments, its central bank governor said on Tuesday, as the country’s buckling economy was running out of foreign exchange.

Central Bank governor P. Nandalal Weerasinghe said the debt default means limited foreign currency reserves would instead be diverted to imports of desperately needed essential items — including scarce fuel.

“It has come to a point that making debt payments are challenging and impossible,” said Weerasinghe, who was only appointed to the top position last week.

Sri Lanka’s external debt is worth around $51 billion (roughly €47 billion).

A statement from the Finance Ministry said creditors and foreign governments could capitalize any interest payments due to them, or opt for repayment in Sri Lankan rupees.

Biting inflation prompts weeks of protests

It’s the authorities’ latest attempt to halt inflation and pacify an angry populace.

Demonstrators have taken to the streets in massive numbers since March, protesting the bite of the country’s worst economic crisis in decades.

Huge tax cuts and uncontrolled money printing have put pressure on government finances. Covid-19 pandemic impacts too, which destabilized its tourism industry, have added to the issues. Tourism makes up over a tenth of the island nation’s revenues.

The results have been a 70% plummet in Colombo’s foreign exchange reserves and soaring inflation in fuel and food prices that have frustrated ordinary Sri Lankans.

Power cuts and diesel shortages have become the norm in the country of 22 million

Hospitals are putting off medical procedures amid power cuts and medicine shortages. Scarce printing material has meant students experienced a delay in exams and officials turned off street lights to save energy.

Calls for Rajapaksa’s step-down

Demonstrators are calling for an end to President Gotabaya Rajapaksa’s government, accusing the president of mishandling the economy and of nepotism.

Gotabaya was elected in 2019 and promised tax cuts during his campaign. He went on to appoint his brother Mahinda Rajapaksa as prime minister and installed family members in key positions.

The president’s recent dropping of his brother Basil Rajapaksa as finance minister, as well as a cabinet shuffle, has not quelled the criticism.

Violence broke out Thursday last week as protestors clashed with security forces, prompting authorities to impose a temporary curfew and briefly block social media. A similar mass demonstration took place at the beginning of April. Many continue to camp in front of President Rajapaksa’s office.

Amid the crisis, the government has turned to India and China for help. Authorities have also started talks with the International Monetary Fund and are hoping to secure a $3bn (2.7bn) bailout.