Foreign reserves on slippery slope
Sri Lanka will roll over short term debt and official loans while eagerly awaiting China’s financial assistance to avert a flagging foreign reserve position and balance of payment issue, State Ministry of Finance officials have said.
The total debt repayment including the interest for this year stands at US$7.3 billion and it has now come down to $6.9 billion after the recent settlement of a $400 million SWAP facility granted by India, official data showed.
Sri Lanka’s next large debt repayment of $1 billion is in July 2021, along with $4.6 billion worth of bond redemptions this year and another sum of $500 million payment in January 2022.
The Finance Ministry and the Central Bank are saddled with a huge fiscal policy and monetary responsibility in fiscal policy and debt management to overcome the economic storm, financial analysts said.
Capital and import controls help slow the pace of foreign reserve depletion and the rupee does not look grossly misaligned at present, they added. However immediate solutions should be evolved to tackle balance of payment crisis arising out of structural weaknesses including the narrowing of trade, poor tax revenue, and the drying up of foreign direct investment (FDI).
The government is optimistic in managing the current economic situation by prudent fiscal and monetary measures curtailing unnecessary public expenditure and structural adjustment programmes, State Minister for Finance Ajith Nivard Cabraal said.
Defending the ability to continue debt servicing, he said that the Government was also negotiating with India for a $ 1 billion SWAP, and $700 million is expected as the second tranche of a $ 1.2 billion syndicated loan from the China Development Bank.
The first $ 500 million was transferred by China Development Bank in March last year, he said adding that the government will also revisit a $500 million Samurai bond from Japan and possibly a Panda bond as well.
A $1 billion Repurchase arrangement with the US Federal Reserve, announced in July last year will realise this year and the total reduction in the import and fuel bills would save Sri Lanka about $2 billion, which would also help to swell reserves.
Net capital outflows were around $540 million (0.7 per cent of GDP) in 2020, mostly from the treasury securities market.
Outward remittances have been limited, while inward remittances will be exempted from certain regulations and taxes.
A scheme has also been introduced to insure investors against foreign exchange risk, by allowing domestic currency proceeds from qualified investments in treasury bonds to be converted at the same exchange rate that prevailed at the time of initial investment.
Commercial banks are prohibited from purchasing foreign currency denominated Sri Lanka International Sovereign Bonds until end-March 2021, Finance Ministry sources disclosed.