As the country grapples with its greatest financial crisis in more than 70 years, Sri Lanka has defaulted on its debt for the first time in its history. On Wednesday, a 30-day grace period to pay $78 million in overdue debt interest payments ended.

The governor of the central bank of the South Asian nation declared the country to be in “pre-emptive default.” Two of the world’s largest credit rating agencies confirmed Sri Lanka has defaulted later on Thursday.

When governments are unable to satisfy some or all of their debt payments to creditors, defaults occur.

It can undermine a country’s investor reputation, making it more difficult for it to borrow money on foreign markets, further eroding confidence in its currency and economy.

“Our position is very clear, we said that unless they come to the restructure [of our obligations], we will not be able to pay,” central bank governor P Nandalal Weerasinghe said on Thursday when asked if the country was now in default. So that’s what pre-emptive default means.

“There can be technical definitions… from their side they can consider it a default. Our position is very clear, until there is a debt restructure, we cannot repay,” he added.

Sri Lanka is attempting to restructure loans to foreign creditors totaling more than $50 billion to make repayment more affordable.

The pandemic and rising energy prices have hurt the country’s economy, but some argue the current problem was caused by the previous government. Medicines, fuel, and other essentials are in short supply due to a persistent shortage of foreign money and rising inflation.

Even while it appeared like Sri Lanka was suffering from the effects of global economic woes, Professor Mick Moore of the University of Sussex, a former consultant for the Asian Development Bank, stated it was “emphatically not that.”

“This is the most man-made and voluntary economic crisis of which I know,” he said in a television interview.

Prof Moore claims that the previous administration borrowed money for infrastructure projects and then “insisted in this very macho attitude” on repaying the increasing debts rather than negotiating a debt restructure with creditors.

“They literally gave away practically all the foreign exchange they could command,” he claimed, adding that the administration “continued along in this way until about six months ago.”

“This is egregious incompetence,” he added.

Prof Moore described the situation in the country as “very grave.”

Due to the escalating problem, huge, often violent protests against President Gotabaya Rajapaksa and his family have occurred in recent weeks.

The country has already begun bailout talks with the International Monetary Fund (IMF) and must restructure its debt deals with creditors.

Later on Thursday, an IMF spokesman stated that the present talks on a possible loan package would be completed on Tuesday.

Sri Lanka’s government has already stated that it will require up to $4 billion this year.

Weerasinghe predicted that Sri Lanka’s already high inflation rate would continue to grow.

“Inflation obviously is around 30%. It will go even [higher], headline inflation will go [up] around 40% in the next couple of months,” he said.

He was speaking after Sri Lanka’s central bank kept its two main interest rates unchanged after raising them by seven percentage points at its previous meeting.

The main loan rate in the country stayed at 14.5 per cent, while the deposit rate remained at 13.5 per cent. This came as no surprise in many ways. A few weeks ago, the warning sirens of a possible default were already wailing.

But, more importantly, nobody is surprised on the streets of Sri Lanka, where the crisis is wreaking havoc.

As petrol lines stretch for kilometres, fuel is sold on the black market for exorbitant prices, and lineups for free bread handouts get longer by the day, the island’s incapacity to repay debts is becoming painfully apparent.

Prime Minister Ranil Wickremesinghe said in his first interview since taking office last week that things in Sri Lanka will get worse before they got better, but he couldn’t say how bad.

“No-one has got all the details… so I will be like a doctor who’s opening up the patient for the first time.”

(Adapted from BBC.com)

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