Sri Lanka stumbles closer to default as economic crisis worsens

Sri Lanka is sliding into a default as the grace period on two unpaid foreign bonds ends on Wednesday, the latest blow to a country rattled by economic pain and social unrest. The island nation could be formally declared in default if it fails to make an interest payment to bondholders before the deadline, when the 30-day grace period for missed coupons on dollar bonds ends. That would mark its first default on its foreign debt obligations.

Sri Lanka’s government announced in mid-April it would stop paying back its foreign debt to preserve cash for food and fuel imports as it struggled with a dollar crunch that’s led officials to implement capital controls and import curbs. A few days later, it failed to service a $78 million coupon on its dollar bonds due in 2023 and 2028, leading S&P Global Ratings to declare a selective default. Prime Minister Ranil Wickremesinghe, who was appointed last week following violent unrest, will provide a “full explanation” of Sri Lanka’s financial crisis on Monday. He also said Sri Lanka is in the process of exploring other options of securing funds to pay for the coming week’s fuel requirements given the dollar scarcity in banks.

He is expected to hold discussions with the attorney general’s department on curbing President Gotabaya Rajapaksa’s sweeping executive powers and the proposals will be presented to Cabinet for approval, he said in a series of tweets. The Sri Lanka Freedom Party, once allied with President Rajapaksa’s government but now independent, has decided to join the new administration by putting forward its members of parliament for cabinet positions. A meeting between the party lawmakers and the prime minister will be held on Monday.

The main opposition Samagi Jana Balawegaya party said it won’t join government. India’s diplomatic mission in Sri Lanka also said that 12 shipments of diesel, or more than 400,000 metric tonnes, were delivered to Colombo on Sunday under a credit line between the two nations.

For weeks Sri Lanka has been grappling with major fuel shortages that have seen drivers queue for hours outside gasoline pumps and businesses struggle to secure diesel for power generators amid hours-long power cuts.