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Central bank chief says Sri Lanka will meet all debt repayments while rebuilding Forex reserves as country suffers another ratings downgrade.

COLOMBO -Sri Lanka’s government will meet all 2022 debt repayments and work on a more comprehensive plan to address dwindling foreign exchange reserves, central bank Governor Ajith Nivard Cabraal said, as the country suffered another ratings downgrade.

Cash-strapped Sri Lanka managed to boost its reserves to US$3.1 billion at the end of December thanks to a yuan currency swap with China worth US$1.5 billion and is in talks with India and Qatar to obtain multiple credit lines and a currency swap arrangement, totalling around US$2.9 billion.

The country needs to repay about US$4.5 billion in debt this year, starting with a US$500 million International Sovereign Bond (ISB) maturing on Jan 18 for which fund allocations have already been made, Cabraal said.

“Not paying debt will push us into bigger challenges,” Cabraal said during an event organised by the department of government information.

“We need a more comprehensive, longer-term plan to address debt and other issues in the Sri Lankan economy. Not honouring ISBs will get Sri Lanka into a path of pain.”

Meanwhile S&P Global Ratings cut Sri Lanka’s sovereign credit rating deeper into “junk” territory, to ‘CCC’ from ‘CCC+’ with a negative outlook, citing rising repayment pressures and “uneven access” to financing.

“These developments indicate a rising probability of sovereign default scenarios playing out over the next 12 months in the absence of an unforeseen positive development,” S&P said.

Sri Lanka’s finances had already been under pressure before the pandemic with tourism falling off as a result of the Easter Sunday bombings in 2019 that targeted churches and hotels and killed 267 people.

Cabraal said the country has lost about US$9 billion from tourism revenue due to the pandemic in the last two years, but he expected a pick-up in tourism in the next 2-3 months would help rebuild reserves.

ENERGY IMPORT BILL

The recent sharp increase in the energy import Bill, due to surging global prices for oil and gas, have exerted more pressure on Sri Lanka’s reserves.

Cabraal said the negotiations with India were at advanced stages. Sri Lanka is seeking a US$1 billion credit line, and a US$400 million swap arrangement with India, plus a US$500 million credit line for fuel involving Indian Oil Corp, which has operations on the island.

And discussions with Qatar for a US$1 billion credit line are also under way. Cabraal said the government could also look at a fresh loan from China, which is Sri Lanka’s fourth biggest lender, behind international financial markets, the Asian Development Bank (ADB) and Japan.

Sri Lanka’s sovereign bonds are testimony to the waning confidence: The Jan 18 bond is trading almost at par, while the US$1 billion July issue stands at just above 70 cents in the dollar, with bonds maturing 2025 and beyond trading deeply distressed at half their face value.

“There is broad agreement that the country will have to go to the IMF (International Monetary Fund) eventually and that we will then see a debt overhaul, and the market is pricing this in,” said Lutz Roehmeyer at Capitulum Asset Management, who holds the country’s sovereign bonds.

The government is reluctant to seek support from the fund.

“Approaching the IMF is not something to be taken lightly,” Cabraal said. “Our view is the path we are on is the most appropriate. The IMF is not a fix-all solution, it’s not a magic wand.”

Source: Reuters

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