Crisis-stricken Sri Lanka defaulted on its $51 billion external debt on Tuesday, calling the move a "last resort" after running out of foreign exchange to import desperately needed goods.
The island nation is grappling with its worst economic downturn since independence, with regular blackouts and acute shortages of food and fuel.
Sri Lanka's finance ministry said in a statement that creditors, including foreign governments, were free to capitalise any interest payments due to them from Tuesday or opt for payback in Sri Lankan rupees.
"The government is taking the emergency measure only as a last resort in order to prevent further deterioration of the republic's financial position," the statement said.
It added that the immediate debt default was to ensure "fair and equitable treatment of all creditors" ahead of an International Monetary Fund assisted recovery programme for the South Asian nation.
The crisis has caused widespread misery for Sri Lanka's 22 million people and led to weeks of anti-government protests.
International rating agencies had downgraded Sri Lanka last year, effectively blocking the country from accessing foreign capital markets to raise much-needed loans to finance imports.
Sri Lanka had sought debt relief from India and China, but both countries instead offered more credit lines to buy commodities from them.