2 January 2023 03:30 am Views - 135
Last year saw foreign investors returning to the rupee denominated bills and bonds, specially towards the end of August amid the optimism over the reform path Sri Lanka had embarked on after authorities announced a staff-level agreement with the International Monetary Fund (IMF).
The data showed that foreign holdings of the rupee denominated government securities rose from just Rs.1.75 billion at the end of 2021 to Rs.25.57 billion by the end of last week, reversing a years-long sell off by the foreigners, which deepened during the last three years.
However, what the foreigners hold at present in Sri Lankan gilts are nowhere near the peaks it was at the end of 2014 when foreign investor interest in the Sri Lankan growth story was at its highest.
For instance, back then foreigners held over Rs. 450 billion worth rupee treasuries before they started selling their holdings when the country’s economy started facing multiple challenges, which ultimately led to a bail out package with the IMF in 2016.
Although the government, which came into power in 2019 even offered incentives including to assume foreign exchange risk of those who were willing to invest in the Sri Lankan gilts from 2020, investors continued to withdraw their investments as they did not buy into Sri Lanka’s home-grown economic policy that was practiced at that time.
By mid 2021, it was clear that Sri Lanka was heading for a default on its foreign debt after its foreign incomes ran dry due to the pandemic and also as a result of its inability to raise foreign borrowings to roll over its maturing debt.
By the end of 2020, foreigners held Rs.6.87 billion worth of rupees bills and bonds before such holdings came below Rs.2.0 billion a year later.
While most of the increase in foreign holdings took place in the first few weeks following the announcement of IMF’s staff level agreement on September 01, the initial interest appeared to fizzled out thereafter as the weekly holdings moved only by minute amounts.
For instance, in the week ended December 28, such holdings increased by only 0.19 percent from the previous week.
Foreign investors’ lacklustre interest in Sri Lankan treasuries could be due to the slow progress the country has been making in its reform agenda and the long-drawn-out path for economic recovery.
Meanwhile, officials are forecasting further delays in getting the IMF Board approval to Sri Lanka’s Staff level agreement on a US$ 2.9 billion rescue package, a key prerequisite which determines the direction the Sri Lankan economy would take in 2023.
The sharp rise in the US treasury yields could also be acting as a deterrent for funds flowing back into emerging and developing countries.
The US Fed’s aggressive campaign of interest rate hikes to combat their decades-high inflation, has sent the dollar rallying to multi-year highs while sending other market currencies declining against the greenback taking much toll on their foreign exchange reserves.