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By Dilina Kulathunga:

Sri Lanka’s short-term debt obligations against its official reserves - a measure of the country’s external sector vulnerability - still remains elevated but the United States-based rating agency said it was on a declining trend.


Accordingly, Sri Lanka’s debt maturing within 12 months is over and above the country’s official reserves, at 118.6 percent in 2014, Moody’s External Vulnerability Indicator (EVI) showed.


The EVI measures the adequacy of a country’s official reserves to cover its short-term debt in the event of sudden stop in external credit extension.

In 2013, Sri Lanka’s EVI was as high as 124 percent, significantly above the 100 percent threshold for external creditors.

However, Sri Lanka’s external vulnerability has been on a reducing trend since 2012 when the EVI was at 132 percent and is expected to fall below 100 percent in 2015.

“At US $ 7.1 billion as of March 2014, official reserves are on a trajectory to cover maturing debt obligations next year,” Moody’s said.

Moody’s projects 97.2 percent EVI by end-2015. Moody’s EVI is based on an official foreign reserve which excludes gold and International Monitory Fund (IMF) account holdings.

Meanwhile, higher commercial bank issuances, which are classified as banking sector external liabilities, do also contribute to outstanding short-term debt, which will add on to the numerator.

It was only last week the same rating agency highlighted Sri Lanka’s weak debt affordability due to its exponentially high debt/revenue ratio of 589 percent, interest payments being 5.1 percent of gross domestic product (GDP) and 38.5 percent interest payments as a percentage of revenue.

"Sri Lanka’s debt maturing within 12 months is over and above the country’s official reserves, at 118.6 percent in 2014, Moody’s External Vulnerability Indicator (EVI) showed"

The ratio of short-term debt to external reserves is a commonly used yardstick to measure a country’s external reserves position but Sri Lanka’s Central Bank is quite content to measure its official reserves based on its equivalent to months of imports.

Sri Lanka is recovering from a balance of payment crisis since end-2011 when the Central Bank sold as much as US $ 2.0 billion of its US $ 8.1 billion official reserves (as of July 2011) to defend the rupee, which was falling due to cheap imports. Then the IMF’s US $ 2.6 billion bail-out facility, which concluded in 2012, rescued the country from the balance of payment crisis. By end-May 2014, Sri Lanka’s gross official reserves amounted to US $ 8.8 billion, equivalent to 5.9 months of imports. Sri Lanka aims to increase its gross reserves to US $ 10.0 billion by end-2014.