Banks granted leeway to buy sovereign bonds using new foreign inflows

• CB says commercial banks and NSB can buy Lankan ISBs using new foreign currency inflows
• Purchase of ISBs using existing foreign currency suspended for further 3 months 

Some leeway has been granted to commercial banks and the National Savings Bank (NSB) to buy sovereign bonds issued by Sri Lanka after three months of suspension, but such purchases should be made using new foreign currency inflows received by the banks. 

The Central Bank has given this leeway easing the restriction imposed on March 19, which suspended the purchases of international sovereign bonds (ISBs) by banks in a bid to stem pressure on the currency. 

While the new directive will allow banks to purchase ISBs issued by Sri Lanka using fresh foreign currency inflows, any purchases from their existing foreign currency is suspended for further three months effective from June 19. 

“The Central Bank of Sri Lanka with a view to easing the pressure on the exchange rate and the stress on financial markets due to the impact of Covid-19 outbreak, requires licensed commercial banks and National Savings Bank to suspend the purchase of Sri Lanka International Sovereign Bonds (ISBs) for a period of three months unless such a purchase of ISBs is funded by using new foreign currency inflows to the banks,” the directive stated. 

The leeway may have been prompted considering the requests made by banks, which have been taking receipts of refinancing lines from various European and Middle East based development financial institutions (DFIs) and other funds in recent weeks.

Sri Lankan banks have been using ISBs to park foreign currency funds as a natural hedge. They then release rupee loans corresponding to the amount raised in foreign currency.   
There had been several foreign refinancing schemes received by commercial banks during last few weeks to be lent to various designated sectors in the economy, such as organic farming, energy efficient projects and export-oriented SMEs. 

As global borrowing costs fell to near zero levels, DFIs and funds are actively seeking opportunities to allocate part of their funds in relatively high yielding assets while Sri Lankan banks are competing to offer single digit rate loans to clients, who are seeking low rate loans to revive their businesses.

For the first time these DFIs and funds are also competing with massive Central Bank stimulus that offers liquidity at near zero levels. 

Last week the Monetary Board tripled its re-finance scheme to provide liquidity to banks at 1 percent, which will be re-lent at 4 percent to businesses.