Sri Lanka's finance minister said Tuesday the island faces a "dangerous foreign exchange crisis" but the government denied it would seek an international bailout.

Basil Rajapaksa, 70, the youngest brother of President Gotabaya Rajapaksa, said state coffers had also suffered huge revenue losses in the Covid-19 pandemic.

The president declared a state of emergency last week as most private banks ran out of foreign currency to finance imports of essentials, triggering food shortages.

The government had already banned imports of cars, other goods and some cooking oils and spices in a bid to save currency.

"We are facing a dangerous foreign exchange crisis," the finance minister told parliament.

"We are also facing a shortage of rupee revenues because of lockdowns."

He said the fall in revenue was between $7.5 billion and $8.0 billion more than anticipated.

The pandemic brought the country's key tourism industry to a standstill and the Sri Lankan economy contracted by a record 3.6 percent in 2020.

Sri Lanka's finance minister Basil Rajapaksa said state coffers had suffered huge losses
Sri Lanka's finance minister Basil Rajapaksa said state coffers had suffered huge losses AFP / ISHARA S. KODIKARA

Basil Rajapaksa did not say how the government would solve the foreign exchange shortage, which has also held up imports of medicines.

The main opposition SJB party said the government should seek an International Monetary Fund (IMF) bailout to avoid a sovereign debt default by next year.

However, junior finance minister Ajith Cabraal has insisted Sri Lanka will not default.

"I want to reassure all those who may have been concerned, as a result of these reports that Sri Lanka would not be able to meet its debt, that we are very much having the ability to do so," Cabraal said before Tuesday's parliamentary debate.

Official figures show Sri Lanka's foreign reserves fell to $2.8 billion at the end of July. It has to repay about $2.0 billion to service its foreign debt during the rest of the year.

Former central bank deputy governor W.A. Wijewardena told AFP that Colombo would be forced to seek a bailout unless a friendly country helps.

"It is inevitable that Sri Lanka will have to go to the IMF," Wijewardena said.

"Right now the country doesn't have sufficient forex to maintain its import programme unless China or India helps."

International rating agencies have downgraded Sri Lanka's credit status, expressing fears that it could soon default.

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