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Sri Lanka extends exchange controls, bonds under fire

LONDON, July 2 (Reuters) – Sri Lanka extended foreign exchange controls for another six months on Friday in its latest bid to preserve the country’s dwindling currency reserves.

The restrictions published in the country’s official gazette

focus on limiting the amount of dollars Sri Lankans and local firms are allowed to send out of the country.

The curbs come as worries continue about the government’s ability to repay its debts, despite regular reassurances from ministers and officials that it will.

Mixed with the ongoing COVID-19 pandemic, apparent resistance to International Monetary Fund support and patchy demand in recent local debt auctions, market pressure has intensified.

Friday saw the worst day for the country’s government debt markets since October, with one bond due to be repaid next July falling more than 4 cents and a number of others dropping between 2 and 4 cents.

“If Sri Lanka is to avoid a default in the medium-term it needs an IMF programme that will help anchor expectations of fiscal consolidation,” said Raza Agha, head of emerging markets credit strategy at Legal & General Investment Management.

Head of Barings’ Global Sovereign Debt and Currencies Group Ricardo Adrogue added that it was encouraging though that the government seemed determined not to default.

“That is a big plus, but the (debt) numbers however are eye-opening,” highlighting how the country spent roughly 50% of government revenues on debt payments.

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