Sri Lanka to temporarily halt foreign debt payments to avoid a hard default

Country's central bank governor says the action is being taken in good faith, and nation has never defaulted on its debt payments

Newly appointed governor of Sri Lanka's central bank Nandalal Weerasinghe says making debt payments has become challenging and impossible. AP

Sri Lanka will temporarily suspend foreign debt payments to avoid a hard default, the central bank governor said on Tuesday, with its limited foreign reserves required for imports of essential items such as fuel.

"It has come to a point that making debt payments are challenging and impossible. The best action that can be taken is to restructure debt and avoid a hard default," Governor P Nandalal Weerasinghe said.

Sri Lanka is due to start talks with the International Monetary Fund on a loan programme next week, with the country suffering from prolonged power cuts alongside shortages of food and medicines.

The island nation's foreign reserves stood at a paltry $1.93 billion at the end of March, with foreign debt payments of around $4bn due this year, including a $1bn international sovereign bond maturing in July.

The governor said the action was being taken in good faith, emphasising that the country of 22 million people had never defaulted on its debt payments.

"This will be on a temporary basis until we come to an agreement with creditors and with the support of a programme with the IMF," said Mr Weerasinghe, who took office last week amid growing public unrest triggered by the economic crisis.

"We need to focus on essential imports and not have to worry about servicing external debt," he said.

JP Morgan analysts estimate Sri Lanka's gross debt servicing would amount to $7bn in 2022 and a current account deficit of around $3bn.