CB settles over US$ 1 bn debt since April using foreign reserves

• Raises over trillion rupees in T-bills, bonds and SLDBs to fund govt. finances 
• Frequency of T-bond auctions expanded to 2 in May and June to finance govt.
• Remaining debt settlements from June to December estimated at US$ 3.8bn
• Sri Lanka had foreign reserves worth US$ 6.5 bn end of May

Sri Lanka has settled foreign currency loans up to US$ 1,007 million during the three months from April 8 to June 22 using foreign currency reserves as liquidity became challenging due to sour external market conditions and slower foreign earnings resulting from the 
COVID pandemic. 

Sri Lanka lost US$ 716 million in foreign reserves in May, almost entirely due to foreign debt settlements during the period as conditions for external liquidity became harder while the earnings from trade and services inflows were below their pre-pandemic levels, albeit a rebound seen from the month before. 

By the end of May Sri Lanka had foreign reserves of US$ 6.5 billion.

“Debt repayments of the government are usually settled using government foreign reserves. As the government could not raise adequate liquidity owing to the unprecedented adverse market conditions, the Central Bank continued to provide liquidity from its foreign reserves since 08 April 2020,” the Central 
Bank stated. 

With the billion dollar repayment in foreign debt, Sri Lanka has so far settled over Rs.1.5 trillion during the first six months of 2020, latest data from the Central 
Bank showed.

Last week, Fitch Ratings estimated the remaining debt settlements from June to December at US$ 3.8 billion and confided that the country could meet all its debt obligations due for 2020 through loans that are currently under discussions with bi-lateral and multi-lateral agencies while reserves could be used to retire a billion dollar sovereign bond falling due 
in October. 

The Central Bank has also indicated that it could launch another sovereign bond to bolster the country’s external liquidity profile, if capital market conditions improve towards the end of the year.But, Fitch Ratings expects Sri Lanka’s next sovereign bond issuance in 2021. 

While other foreign earnings will be impaired in 2020 compared to normal conditions, recent data coming from merchandise exports and remittances showed signs of rebound from their April trough. 

Meanwhile, in the public financing side, the Central Bank has raised over a trillion rupees to the government so far in 2020, out of which Rs.600 billion being raised during the three months to mid-June via regular Treasury bills, bonds and Sri Lanka Development Bond auctions as the government loosened up its purse strings to provide fiscal support to the people whose livelihoods were affected by the pandemic. “Further, deviating from the established practice of conducting a single monthly Treasury bond auction, the frequency of Treasury bond auctions a month during May and June 2020 was expanded to two to finance government’s funding requirements,” the Central Bank said.