MP de Silva over-interprets Sri Lanka’s borrowing from the New York Fed

20 August 2020 12:02 am Views - 807

 

Last month, the Central Bank of Sri Lanka entered into an agreement with the Federal Reserve Bank, New York (FED) under its temporary ‘FIMA Repo Facility’. MP Harsha de Silva describes this as the first time that Sri Lanka was asked to provide collateral for a sovereign international loan and attributes it to the poor international perception of Sri Lanka’s economic outlook.

The FIMA Repo Facility was introduced by the FED in March 2020 to mitigate the impact of the Covid-19 pandemic on international financial markets. Like any Repo facility, it necessarily entails placing government reserve assets as collateral by any monetary authority that avails itself of the facility. Monetary authorities in Hong Kong, Indonesia and Chile have also entered into similar agreements under this particular facility.

FactCheck was not able find any disclosure in either the reports or news releases from the Central Bank of resorting to similar collateralised borrowing facilities in the past. Therefore, what MP de Silva characterises as a first time event of Sri Lanka being asked for collateral for a sovereign loan, could also (more appropriately) be characterised as a first time event of Sri Lanka using this type of borrowing facility, which would necessarily entail such collateral. 

However, the MP’s statement that the international community’s perception of Sri Lanka as a high-risk borrower precipitated such an arrangement has merit. 

The standard metric for such an assessment is the risk premium attached to Sri Lanka’s international sovereign bonds (i.e. the difference between their yield rates and that of US Treasury Bonds interest rates); in July, the average risk premium was 13.67%. Fitch Ratings downgraded the Sri Lankan sovereign to B- in April 2020, describing the move as reflecting high refinancing needs, greater uncertainty surrounding financing availability, and low reserve coverage leaving the external position vulnerable to shifts in investor sentiment. 

Hence, while the MP is correct about the context in which Sri Lanka’s borrowing from the New York Fed took place, he overinterprets its significance with regard to the borrowing itself. 
We classify the former MP’s statement as PARTLY TRUE. 

*FactCheck’s verdict is based on the most recent information that is publicly accessible. As with every fact check, if new information becomes available, FactCheck will revisit the assessment.

 

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