Sri Lanka defaults on its bonds and runs out of cash to buy fuel

SRI LANKA has defaulted on its debts for the first time since gaining independence as a financial disaster leaves the country unable to pay for crucial petrol supplies stuck in tankers anchored outside its ports.

A grace period for the country to make $78m (£63m) of interest payments ended yesterday, in effect locking the Asian country out of international markets and thrusting it into even deeper economic crisis.

Sri Lanka has been struck by weeks of increasingly violent protests over surging inflation and shortages of petrol and food.

A ship loaded with fuel is in Sri Lankan waters waiting for payment before it docks, energy minister Kanchana Wijesekera said. He hopes to strike a deal today and urged motorists not to queue at petrol stations in the meantime. The nation owes the same supplier $53m for an earlier shipment.

Sri Lankan president Gotabaya Rajapaksa declared a state of emergency earlier this month, following a day of anti-government protests.

Inflation hit 29.8pc in April, with food prices rocketing by 46.6pc compared to last year.

Prime Minister Ranil Wickremesinghe, appointed last week, is yet to choose a finance minister who will help lead talks with the International Monetary Fund over aid.

The country is also thought likely to appeal for help from China, which has invested heavily in Sri Lankan infrastructure in the last few years as part of efforts to extend its global reach.

Colombo is sitting on $12.6bn of bonds held by overseas investors which have been trading deep in distressed territory, with holders bracing for losses approaching 60 cents on the dollar. The government said last month it would halt payments on foreign debt.

Guido Chamorro at Pictet Asset Management, which holds Sri Lankan bonds, said: “The Sri Lanka default is an ominous sign for emerging markets.

“We expect the good times to stop. Slowing growth and more difficult funding conditions will increase default risk particularly for frontier countries.”

The administration is in talks with the World Bank, which provided $160m of aid for social welfare, to use some of those funds for fuel imports.

Sri Lanka’s economic crisis has come from the confluence of the Covid pandemic, rising oil prices and populist tax cuts. The island had been a model for emerging market economies in recent years, growing at an average rate of 6.2pc between 2010 and 2016, according to the World Bank. In the following three years, the figure dropped to 3.1pc.