As bailout talks began this week, Sri Lanka said it had requested emergency financial assistance from the International Monetary Fund (IMF).
Following India’s representations, the international financial organisation will consider offering aid.
Meanwhile, a major credit rating firm predicted “a series of defaults” on Sri Lanka’s foreign obligations after officials announced a payment freeze.
The news comes after Moody’s cut Sri Lanka’s bond rating.
Sri Lankan officials, led by Finance Minister Ali Sabry, are in Washington this week for discussions with the International Monetary Fund (IMF), as the South Asian country faces its worst economic crisis in more than 70 years.
The IMF “commended on the actions already taken by [Sabry] to mitigate the financial situation in Sri Lanka” at a meeting, according to a statement from the country’s finance ministry.
“[The] Minister of Finance has made a request for a Rapid Financing Instrument (RFI) with the IMF. IMF has subsequently informed Minister Sabry that India had also made representations on behalf of Sri Lanka for an RFI,” it added.
“It had been communicated that IMF will consider the special request made despite it being outside of the standard circumstances for the issuance of an RFI.”
A RFI is typically granted to an IMF member country that has “immediate” finance needs due to severe commodity price increases, natural disasters, or conflict. It is not necessary for the country to have a restructured economy plan.
The Sri Lankan government announced last week that it would temporarily default on $35.5 billion (£27.3 billion) in international debt due to the pandemic and the war in Ukraine, which rendered payments to overseas creditors “difficult.”
Sri Lanka’s finance ministry confirmed on Monday that it would miss interest rate payments on international sovereign bonds totaling $78 million.
This was “in keeping with the government policy decision” to halt foreign payouts, according to a spokeswoman.
If the outstanding interest rate payments are not completed within the 30-day grace period, Sri Lanka will default on its foreign debt for the first time since its independence from the United Kingdom in 1948.
“A decision in this regard will be released in due time,” the spokesperson replied when asked if payment would be made during the grace period.
Food shortages, skyrocketing fuel prices, and significant power outages have sparked large protests in recent weeks, as the country’s foreign currency reserves have depleted.
Sri Lanka’s offshore bonds are “possibly in, or very close to default,” according to the latest Moody’s assessment.
The country’s decision to halt some payments, according to the rating agency, “will result in a series of defaults,” with the first coupon payments for the government’s international bonds due today, April 18, 2022. A bond’s interest payment is called a coupon.
The non-payment was “unlikely to be rectified during the grace period,” according to Moody’s, because a debt restructuring scheme with the IMF “would take time.”
Sri Lanka was also on the verge of defaulting on its debts, according to two other major credit rating agencies last week.
Credit ratings are designed to help investors understand the level of risk they are taking on when purchasing a financial instrument, in this case a sovereign bond.
Sri Lanka’s foreign debt is primarily made up of international sovereign bonds.
Countries including China, Japan, and India, as well as large financial corporations like BlackRock, UBS, and Allianz, own them.
Meanwhile, due to the “current circumstances in the country,” the Colombo Stock Exchange would be closed for the entire week.
(Adapted from Business-Standard.com)