Sri Lanka receives $222m in bridge financing from World Bank

COLOMBO • Sri Lanka has received US$160 million (S$222 million) in bridge financing from the World Bank in order to pay for essential imports, Prime Minister Ranil Wickremesinghe said yesterday.

"We are working to see if these funds can be used for fuel imports," he told the country's Parliament.

"The statistics have gone haywire," he added. "But the reality is we don't even have US$1 million."

Sri Lanka was set yesterday to default on US$12.6 billion of overseas bonds as the new Prime Minister struggles to stabilise an economy spiralling into chaos, fuelled by a lack of dollars and surging inflation.

The South Asian nation was set to blow through the grace period on US$78 million of payments yesterday, marking its first sovereign debt default since it gained independence from Britain in 1948.

Its bonds already trade deep in distressed territory, with holders braced for losses approaching 60 US cents on the dollar.

The government said last month it would halt payments on foreign debt.

Mr Wickremesinghe, appointed last week, has yet to choose a finance minister who will help lead talks with the International Monetary Fund (IMF) over badly needed aid. He had warned on Monday that the country was down to its last day of petrol supplies, as it did not have the dollars to pay for shipments aboard tankers anchored just offshore.

He also said it would need to print money to pay government salaries, a move that will worsen inflation already running near 30 per cent.

Speaking in Parliament yesterday, Power and Energy Minister Kanchana Wijesekera appealed to people to stop queueing for fuel for the next two days. A petrol shipment has been at Colombo port since March 28 but the government has been unable to pay, he added.

"There aren't enough dollars available to open letters of credit," he said. "The very small reserve stock of petrol is being released for essential services like ambulances."

Hit hard by the pandemic, rising oil prices and populist tax cuts, Sri Lanka's dire economic situation has led to spiralling inflation and shortages of essential supplies, bringing thousands of people onto the streets in protest.

Violence between pro-and anti-government factions and police left nine dead and more than 300 injured last week, and was followed by the resignation of prime minister Mahinda Rajapaksa.

To bring back some stability, Mr Wickremesinghe has proposed selling the loss-making national airline, printing more money and possibly raising taxes as well as energy and utility prices. Economists said most of the Prime Minister's proposals made sense.

The sale of Sri Lankan Airlines, though, is not likely to fetch much money in the current environment.

However, the plan to print money was concerning and would raise fiscal and external imbalances, said senior economist Patrick Curran at London-based Tellimer.

Ratings firm S&P said printing money would have "significant inflationary implications".

Global chief economist Charles Robertson at Renaissance Capital in London said the removal of electricity and fuel price subsidies was essential. These and other reforms would form the starting point for discussions with the IMF for a crucial bail-out, other economists have said.

"We will also have to see massive tax hikes, probably a doubling of VAT (value added tax) from 8 per cent to at least back to the 15 per cent we saw in 2019," Mr Robertson said.

"It was the cut in those VAT rates which contributed to this crisis," he added.

REUTERS, BLOOMBERG