Foreign reserves slip to US$ 7.2bn in April; still sufficient for debt repayments

• Bilateral & multilateral inflows, subdued imports could lessen pressure on reserves 

Sri Lanka’s official reserves slipped by US$ 354 million during April to end with assets of US$ 7.2 billion as the foreign earnings from exports, services and inflows to the capital account slowed significantly, but the authorities expressed confidence in meeting foreign debt obligations due during the remainder of the year. 

This was after the official reserves falling by US$ 400 million in March from US$ 7.9 billion to US$ 7.5 billion due to external repayments, data from the Central Bank showed. 

While the current reserves position is sufficient to cover 4 months of imports under normal circumstances, the import restrictions on non-essentials, subdued consumption demand which is expected during the remainder of the year and the record low crude oil prices are expected to largely offset the negative impact on the current account balance. 

According to many economic analysts, due to Sri Lanka’s net importer status, the above conditions could largely favour the current account balance in 2020. 

“Despite weaker foreign exchange inflows, we expect the current account deficit to narrow on the lower import oil bill and significant import compression,” Moody’s Investors Service said in its latest review of the Sri Lankan sovereign while cautioning on heightened overall pressures on the country’s fragile fiscal and external position in view of the external debt repayments amid the impaired access to capital markets. 

Sri Lanka has slightly over US$ 4.0 billion in foreign debt repayments in 2020 including interest, which also includes a billion dollar sovereign bond repayment due in October. 

While a section of the debt due for 2020 has already been paid during the first three months, authorities have secured multiple bilateral and multilateral funds and have also worked on securing a couple of swap lines from friendlier Central Banks. 

While Sri Lanka has already secured US$ 500 million syndicated loan from China Development Bank, it is expected to increase to US$ 1.2 billion by the year end. The government has also sought additional funding from the Asian Development Bank, the World Bank, the Asian Infrastructure Investment Bank and Agence Française de Développement, Moody’s said. 

Meanwhile, Sri Lanka has also written to the International Monetary Fund requesting US$ 800 million under its Rapid Financing Facility in a two-year programme. 

Under swaps, the government has worked with Reserves Bank of India for a US$ 400 million swap line and a US$ 1.5 billion line with People’s Bank of China to buffer external repayment risks. 

However Moody’s said while such measures temporarily boost foreign exchange reserves, they are time bound and represents a liability to the monetary authority. 

“ They do not meaningfully increase foreign exchange reserves as do non-debt-creating inflows, such as export receipts or foreign investment, either portfolio or direct”, it added. 

Meanwhile the government has also requested for debt deferment and debt forgiveness in certain other cases to obtain space on liquidity until the economic crisis triggered by the China originated pandemic passes. 

In mid April, G7 Finance Ministers and Central Bank Governors expressed their readiness to provide time-bound suspension on debt service payments due on official bi-lateral claims for all countries eligible for World Bank concessional financing, if joined by all bilateral official creditors in the G20 and as agreed with the Paris Club.

Meanwhile, in response to a question on the foreign debt obligations due for this year at a recent interview, the billionaire investor, Dhammika Perera brushed off undue fears over Sri Lanka’s ability to service its debt by saying that the government could settle the debt from the reserves without any problem. 

“We have reserves worth US$ 7.4 billion within our country. Let’s say what we have to pay is US$ 4.5 billion for the entire year. Let’s say we pay the debt from the reserves. What would happen to the country? Nothing would happen,” Perera said. 

Sri Lanka on average has US$ 4.0 billion to US$ 4.5 billion of debt servicing payments annually during 2020 to 2025, including sovereign bond repayments of US$ 1.0 billion each in October 2020 and July 2021.