Sri Lanka’s foreign debt sitting on a volcano

Sri Lanka’s foreign exchange crisis is sitting on a volcano with a shortage of US dollars in the market exacerbating the imports/ exports situation while US$3.5 billion more of foreign debt needs to be settled by December this year, economists said.

The next repayment, the biggest so far this year, is a 10-year, $1 billion International Sovereign Bond (ISB) sold in 2011 at the rate of 6.25 percent per annum and maturing on July 27. Sri Lanka’s total foreign repayments this year is made up of $6.3 billion of which $2.6 billion has been repaid up to June 2021 and the balance due by December. Sri Lanka’s foreign debt falls into two categories - foreign loans and ISBs/Sri Lanka Development Bonds.

The shortage of foreign exchange is affecting importers and some exporters seeking to import raw material as banks are refusing to open Letters of Credit (LCs) to meet these commitments. It has also affected individual customers possessing foreign currency savings accounts. In one case, a customer who wanted to withdraw $1000 from her own account was told by her bank that they would get back to her as soon as they have ‘dollars’, according to banking sources.

While the dollar was trading at Rs.202-203 levels in the official inter-bank money market, it is trading at Rs. 225-230 outside. A money changer in Colombo confirmed that he was paying Rs. 230 to buy dollars.

While opposition legislators like Dr. Harsha De Silva are urging the Government to restructure the precarious foreign debt position and seek International Monetary Fund (IMF) help, State Finance Minister Ajith Nivard Cabraal hit back, during a media briefing, saying it was during the former regime that many ISB’s were issued aggravating the problem.

An IMF official told this newspaper on Friday that Sri Lanka is yet to make a request for IMF support even though earlier in the week (Monday), the Central Bank Governor Prof. W.D. Lakshman in a statement claimed that Sri Lanka will receive around $800 million next month under the IMF SDR allocation.

In March a repayment of $550 million was made. Treasury data showed that another 5-year ISB of $500 million has to be repaid by December 11. In total Sri Lanka has $1.3 billion worth of development bond repayments due in 2021.

These repayments are to be made on maturity for development bonds that were issued in 2017, 2018, 2019 and 2020 with maturity periods of one (1) year, 1 year/3 months, two (2) years, 2 years/3 months and four (4) years, according to Treasury data.

The shortage of foreign exchange is affecting importers and some exporters seeking to import raw material as banks are refusing to open Letters of Credit (LCs) to meet these commitments. It has also affected individual customers possessing foreign currency savings accounts.