Chinese bailout sought amidst balance of payments crisis in Sri Lanka
Sri Lanka is turning to its frontline Asian partners China and India for a financial lifeline in curing the ailing economy and a balance of payment crisis emerging over the massive debt situation.
Wide budget deficits running up to over Rs. 800 billion this year and more than Rs.1 trillion in the next year are likely to require at least partial foreign financing, which is extremely difficult to gain amidst the COVID-19 crisis, economic experts said.
According to the Appropriation Bill approved by the Cabinet, total recurrent expenditure for the financial year 2020 has been estimated as Rs.2,692 billion and the capital expenditure at Rs.1,846 billion.
Total recurrent expenditure for calendar 2021 is estimated as Rs.2,690 billion and capital expenditure estimated at Rs.2,216 billion.
Government liquidity and external risks will intensify with revenue decline and foreign debt service payments amounting to around US$4 billion (annually) between 2020 and 2025, the experts added.
Sri Lanka’s foreign net capital outflows have reached a new high of around $500 million ( 0.6 per cent of GDP) as at early September since mid February, mostly from the domestic treasury securities market, official data revealed.
But foreigners started returning to the government securities market as they added nearly Rs.1.8 billion worth of treasury bills and bonds into their holdings during the two weeks ended on September 16.
Sri Lanka is expecting a $700 million loan from China and Samurai and Panda bonds to boost dollar inflows in 2020.
The Reserve Bank of India has provided a $400 million currency swap facility to the
Central Bank and another $1 billion currency swap is forthcoming.
Moody’s Investors Service has downgraded the country’s sovereign rating two notches to Caa1, from B2 last week. It has cited a wide budget deficit, slow reforms and weak institutions in the island nation and its downgrading to Caa1 was one notch prior to categorizing Sri Lanka as a bankrupt country, Dr. Anil Jayantha Fer nando - Chairman Economic Committee, Nat i o n a l Intellectuals Organisation (NIO) told the Business Times.
The latest downgrade will lead to the fall in International Sovereign bond prices making it difficult to raise required yields, he added.
Reputed economist W.A. Wijewardena said the development resulted in the yields of Sri Lanka’s ISB prices falling across the board recently signaling that investors doubt Sri Lanka’s ability to settle the bond.
The next ISB repayment of $1 billion is due in July 2021, said State Minister of Finance, Ajith Nivard Cabraal adding that the government will be able to raise necessary funds from the domestic and foreign markets.
Finance Ministry plans to raise Rs. 1.5 trillion by issuing treasury bonds and bills, Rs. 100 billion via Sri Lanka Development bonds, Rs. 75 billion in Foreign Currency Banking Units (FCBU) while seeking financial assistance from international lending agencies such as the World Bank and the ADB.
The Government has no intention of seeking funds through the International Monetary Fund’s (IMF) Rapid Financing Instrument (RFI), as debt servicing has been effectively managed, Mr. Cabraal added.