COLOMBO: Sri Lanka's central bank governor on Thursday confirmed the country had defaulted on foreign bonds and warned inflation could soar to 40 per cent, but struck an optimistic note that a modicum of political stability was returning.
Addressing the expiration of a grace period on a pair of bonds worth $78 million the previous day, Gov Nandalal Weerasinghe told reporters that the country's first default was not a "hard" one, since it had been telegraphed a month in advance.
"In my view, if we did that without announcing, it would have been a hard default," he said. "That's why we say it's a preemptive default. We announced that we are not in a position to pay. Our position is very clear. Until they [lenders] come and restructure, we can't pay."
Sri Lanka's economy has been hit hard by the pandemic, rising energy prices, and populist tax cuts. A chronic shortage of foreign currency and soaring inflation had led to a severe shortage of medicines, fuel and other essentials.
In recent weeks, there have been large, sometimes violent, protests against President Gotabaya Rajapaksa and his family due to the growing crisis.
The country has already started talks with the International Monetary Fund over a bailout and needs to renegotiate its debt agreements with creditors.
The government has said previously that it needs as much as $4 billion this year.
Weerasinghe also warned that Sri Lanka's already very high rate of inflation was likely to rise further.
"Inflation obviously is around 30 per cent. It will go even [higher], headline inflation will go around 40 per cent in the next couple of months," he said.
He was speaking after Sri Lanka's central bank held its two key interest rates steady following a seven percentage points rise at its last meeting.
The country's main lending rate remained at 14.5 per cent, while the deposit rate was kept at 13.5 per cent
Last month, two of the world's largest credit rating agencies warned Sri Lanka was about to default on its debts.
Fitch Ratings lowered its assessment of the South Asian nation, saying "a sovereign default process has begun".
S&P Global Ratings made a similar announcement and said that a default is now a "virtual certainty".
Credit ratings are intended to help investors understand the level of risk they face when buying a financial instrument, in this case a country's debt - or sovereign bond. (Agencies)
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