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Sri Lanka boosts FX reserves with lift from Chinese swap

COLOMBO – Sri Lanka has raised its official foreign exchange reserves to around US$3.1 billion, helped by a currency swap agreement with China, sources said on Wednesday, as the South Asian country seeks to shore up its battered finances and credit ratings.

The country’s central bank governor, Ajith Nivard Cabraal, said in a tweet on Wednesday reserves has risen to around US$3.1 billion and would remain at that level until year-end.

People familiar with the matter told Reuters reserves had been topped up after a US$1.5 billion currency swap with the People’s Bank of China (PBOC)was finalised on Wednesday.

The central bank confirmed the foreign support but did not specifically reference the Chinese swap arrangement. Cabraal has previously spoken about the swap with the PBOC.

“Foreign currency inflows in connection with several other facilities that are under negotiation at present, are expected to be realised in the early part of January 2022,” the Sri Lankan central bank said in a statement.

“The government and the central bank are confident that the reserve position will remain at comfortable levels throughout the year 2022,” it added.

One of the sources said the swap was denominated in yuan but could be converted into dollars if needed.

Sri Lanka has to repay about US$4.5 billion in debt in 2022 starting with a US$500 million international sovereign bond maturing on Jan. 18.

The country has been looking to add to its reserves through various means including bilateral swaps and loans from other governments and central banks, increasing remittances, curbing imports among others.

China is Sri Lanka’s largest source of import income and a key financier having lent over US$5 billion for various infrastructure projects including ports, highways and a coal power plant over the past decade.

Fitch Ratings on Dec. 18 downgraded Sri Lanka’s sovereign rating to ‘CC’ from ‘CCC’, citing a growing risk of debt default in 2022, despite central bank assurances that steps would be taken to meet all repayments.

Sri Lanka also said the “unwarranted and questionable rating actions” by certain rating agencies have caused “unnecessary” secondary market losses and undue delays in expected foreign currency inflows.

“Inclusion of the swap in the reserves might not change investor sentiment much as it has already been taken into consideration. What Sri Lanka needs is new fund inflows, said Lalinda Sugathadasa, head of Research at ICRA Lanka.

Source: Reuters

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