SL embroils in economic crisis with heavy debts and low reserves
Friday, 17 Sep 2021

SL embroils in economic crisis with heavy debts and low reserves

25 July 2021 07:20 am

Sri Lanka is taking a sticking plaster approach to settle upcoming massive foreign debt repayment by using available foreign reserves without a credible debt reduction plan in place, several economic experts say.

Shortages are pushing prices up for many consumer goods and essential items from rice, vegitables, bread to construction materials to gasoline, triggering protests among Sri Lankans specially fed up with the government’s failure to settle buring issues in prolonged crisis

The Central Bank, left with its own devices, has granted permission to commercial banks and the National Savings Bank (NSB) to purchase international sovereign bonds (ISBs) lifting its previous six months’ ban from this practice.

 These banks were barred from investing in sovereign bonds under certain conditions during the past six months.

Companies have also been allowed to invest in ISBs utilising 50 percent of the foreign currency borrowed from a resident outside Sri Lanka in terms of the prevailing foreign exchange regulations and subject to several terms and conditions.

Sri Lanka has to find to foreign debt payments amounting to US $ $3.7 billion this year, having paid $1.3 billion up to now.

Fitch Ratings has issued a red alert on the possible negative impact on Sri Lankan banks due to their investing in ISBs whose prices are falling in the market and the possibility of the government’s defaulting the loan servicing. It’s based on the erosion of capital due to incurring losses.

The Central Bank has refuted this claim saying that when these banks were permitted to invest in ISBs due risk assessment procedures have been followed and the public need not have any fear of losing their deposits.

Former Central Bank Deputy Governor and eminent economic expert W. A. Wijewardena said that in the short run when the government honours its obligations, banks stand to make a super profit of about 15-20 percent on their investment; hence, there’s no immediate risk.

However, in the long run, if the prices fall further, such gains could be wiped out due to having to mark the investments to market prices.

It depends on whether government is able to inculcate confidence among existing investors by adopting prudent macro policies, he added.

Dr. Wijewardane said that one important requirement is disciplining the budget by improving revenue and economising expenditure.

The $1 billion sovereign bond maturing in July 27 2021 was trading at a discount of about 30 percent and bonds due for repayment between 2022 and 2028 fell around 40 percent below their face value, he said.

A government report has revealed that the bond trading by banks at discounts to face value, after money printing and deficit spending created forex shortages and triggered downgrades, squeezing the country out of international capital markets.

Foreign-currency borrowings are declining while refinancing needs remain high as short-term loans of the banking system’s external debt is on a downward trend.

However, one of the options available for Sri Lanka is to implement re-profiling/restructuring bonds but without the IMF it will be a challenge given the lack of credibility on policy reform, the report revealed.

This debt restructuring or postponement could save around $ 5 billion annually without repaying these loans.

Sri Lanka’s foreign reserves will fall to a level of an average of $365 million per month and finally end up with around $3.7 billion in 2021, provisional estimates showed.

Investors may be cynical of Sri Lanka’s ability to curtail the primary deficit without an IMF programme in place, it said.

The bond restructuring will have to be carried out through discussions with investors in the short term. A request should be made from them to defer the interest for 36 months and the installment for about 48 months, the report suggested.

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