Sri Lanka is running out of money for imports
Government revenues fall short as pandemic curbs hurt economy
Sri Lanka’s dwindling foreign exchange reserves risk spiralling into a crisis that could force the South Asian nation to tighten policy more aggressively and seek an International Monetary Fund bailout.
After meeting a $1 billion debt repayment in July from reserves, the government has only enough dollars to cover less than 2 months of imports. The nation buys wheat, sugar and milk powder from abroad and, with the Sri Lankan rupee down 7.3 per cent this year, the import bill is soaring, stoking inflation and raising concerns about panic buying and hoarding.
“For investors it’s a question of when, not if, they run out of FX reserves,” said Nivedita Sunil, senior analyst for Emerging Markets at Lombard Odier in Singapore. “If you see where the bonds are trading, they are clearly telling you that they are no longer taking a longer term view.”
While authorities maintain they will repay $1.5 billion of foreign bond payments due in January and July, a Bloomberg gauge of one-year default probability has risen almost 20 percentage points, to Asia’s highest level at about 28 per cent.
Government revenues are far short of target as pandemic curbs hurt economic activity, Finance Minister Basil Rajapaksa told parliament on Sept. 7. With a third wave of Covid-19 running across the island, the administration has taken increasingly draconian measures to deal with the crisis, from declaring a state of emergency to seizing rice stocks from private mills. Policymakers have extended lockdowns, raised interest rates, restricted imports and asked banks to offer foreign currency loans.
The emergency measures are necessary “to give legal backing to stop hoarding. But with emergency and sudden lockdowns comes rumours and panic, and that creates excess buying,” said Adrian Perera, chief executive officer of Lanka Rating Agency.
Tourism hit
Travel restrictions have hammered the tourism industry, which makes up about 5 per cent of the economy, while an extended lockdown to try to halt the spread of the delta variant has hurt commerce and industry.
A total $3.6 billion of foreign debt matures in 2022 for Sri Lanka, Fitch calculates.
With currency reserves depleted and inflation now at 6 per cent — the upper end of the central bank’s target range — investors are bracing for more rate increases. Fitch forecasts the central bank will raise rates by another 50 basis points this year.