Sri Lanka suspends refunds of airline bail and airport agency debt

ECONOMYNEXT – Sri Lanka has suspended interest payments on a US$175 million sovereign-guaranteed bond from the flag carrier and loans taken out to build a China-backed airport and expand a runway at the main airport, according to a Ministry of Finance report.

The bond was sold to fund losses after President Mahinda Rajapaksa terminated a management contract with Emirates and renationalised the airline.

Interest on the bond is “pending,” according to the report.

Repayment of two loans from Airport and Aviation Services Sri Lanka to expand the airport at the main Katunayake airport in Colombo and a loan from China to build an airport at Mattala in the south have also been suspended.

Sri Lanka defaulted on its external debt after depleting its reserves following seven years of aggressive open market operations under flexible and discretionary inflation targeting and output targeting (print money for growth).

The state expanded rapidly under “revenue-based fiscal consolidation” where cost-cutting (expenditure-based consolidation) was abandoned, resulting in an increase in expenditure as a percentage of GDP from 17% to 20%.

In December 2019, taxes were cut due to a persistent output gap after two currency crises reduced growth. The International Monetary Fund taught the central bank to calculate an output gap by encouraging it to print money to stimulate growth. (Colombo/July 06, 2022)

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