Central Bank to issue fixed rate, multi-currency development bonds

In a deviation from the practice of issuing dollar denominated Sri Lanka Development Bonds (SLDBs) only at floating rates linked to London interbank offered rate (Libor), the Central Bank this week announced that it would henceforth start issuing fixed rate bonds in currencies other than the United States dollar. 

“Issuance of Sri Lanka Development Bonds (SLDBs) was facilitated through a direct issuance arrangement. Going forward, the Central Bank will issue fixed rate and multi-currency SLDBs, thereby facilitating the financial sector foreign currency deposit mobilisation,” Central Bank Governor Prof. W.D. Lakshman said on Monday.

The Central Bank first made their intentions public to this effect last October. Some economists in fact raised this issue with the Central Bank as to why the bank wouldn’t shift away from the floating rate bonds in respect of SLDBs. 

Libor, the global reference rate, which is used for borrowings worth trillions of dollars linked to financial instruments, is expected to phase out by end of this year.

“SLDB floating rate notes are linked to Libor, which are expected to be phased out by end 2021. In September, Malaysia became the second country in the region to use SOFR in a derivative instrument,” ICRA Lanka, a rating agency said in a recent note.

By end 2020, Sri Lanka’s total outstanding debt in the form of SLDBs was at Rs.495.9 billion in rupee equivalents, down from Rs.559.8 billion at the beginning of the year. 

While Sri Lanka raised serious money through SLDBs in 2020, the settlements overtook the new funds raised resulting in negative borrowing on a net basis. 

This is due to the fact that Sri Lankan government raised more rupee debt in 2020 as it skewed its debt management policy towards the domestic side to take advantage of record low interest rates.