BANGKOK — Sri Lanka’s failure to settle interest payments on sovereign bonds and its subsequent ratings downgrade have drawn unflattering comparisons with the economic meltdown in Lebanon.
The South Asian nation on April 18 failed to pay interest of $78.13 million on $1.25 billion of bonds. Standard & Poor’s followed up this week with a downgrade to a “selective default” rating — the latest knife in the back of the debt-ridden economy.
Foreign investors who had bought the island’s international sovereign bonds (ISBs) were angry that they were misled by promises the debt would be paid. The principal cheerleader was Nivard Cabraal, the then central bank governor. Throughout he stood by views he had expressed to Nikkei in a February interview: “I am determined to pay [ISB holders.]”
“The market was expecting the April 18 coupon to be paid because of assurances by government officials that funds were available,” a London-based emerging markets investor holding Sri Lankan ISBs told Nikkei Asia. But it was “an illogical promise, Lebanon-level illogical,” he added, referring to the Middle Eastern nation that defaulted on its foreign loan payments in 2020.
Sri Lanka’s financial authorities informed international lenders a week before the coupon payment that the country was strapped for foreign reserves. In an $81 billion economy, those reserves had slumped to $200 million, money that is now critical to buying food and other necessities.
That made the country, which must settle foreign debt of $6.9 billion this year, a sovereign defaulter for the first time.
Through July 25, Sri Lanka is on the hook to pay off a $1 billion ISB and make interest payments on other multibillion-dollar ISBs. But since 2020, when ratings agencies downgraded the country’s debt to junk status, the familiar route of borrowing from international capital markets to pay off maturing ISBs has been shut to Sri Lanka.
By the end of that year, the country’s foreign debt was $38.6 billion, or 47.6% of the central government’s total debt, according to the International Monetary Fund.
Now new Finance Minister Ali Sabry is learning that international financial remedies can be slow and daunting. Economic analysts in Colombo, the country’s commercial capital, said the preliminary round of discussions Sabry had with IMF officials in Washington was a “reality check” for a government “not aware about a lot of things.”
These blind spots ranged from “the dangerous macro position that the economy was heading towards, the implications of taking foreign reserves to the brink … a debt default … and the time taken to get an IMF program,” said Anushka Wijesinha, co-founder of the Centre for a Smart Future, a Colombo-based public policy think tank. “The reality is certainly just sinking in, and I think everyone needs to be ready for an extended period of very challenging domestic economic conditions.”