Foreign reserves up in April on China Development Bank loan

• Foreign reserves estimated at US$ 4.47bn as at April-end
• Sri Lanka received US$ 500mn from CDB on April 19

Sri Lanka’s foreign currency buffer rose in April after the country took receipt of the second tranche of the China Development Bank (CDB) loan soon after the New Year holidays, propping up its foreign reserves.

According to the data available through April-end, Sri Lanka had US$ 4,476.5 million in foreign exchange reserves, up from US$ 4,055.2 million by the end of March. 

Sri Lanka took receipt of the US$ 500 million loan from CDB on April 19, as the second tranche of the US$ 1.2 billion budget support loan approved over a year ago in March 2020 at the onset of the pandemic as part of the financial support to fight virus-related economic hardships. 

While the loan propped up foreign reserves, it at the same time strengthened the rupee exchange rate against the US dollar, though briefly, and succeeded in lowering the yields of the Sri Lanka issued international sovereign bonds, particularly of the one coming due in July, reassuring investors of the country’s ability to honour its external liabilities.

The balance US$ 200 million of the CDB is due and it was earlier planned to release this tranche coinciding with the upcoming visit of President Gotabaya Rajapaksa to China. 

Sri Lanka’s economy was off to a fine start during the first quarter of 2021 before the virus scare re-emerged as authorities ramped up testing.  This applied breaks to the momentum as people were asked to stay at home for the fear of contracting the virus. 

More than two thirds of the Sri Lankan economy is associated with consumption. Hence virus related restrictions have a significant impact on economic activities with demand for goods and services declining, and thereby taking a massive toll on businesses, jobs and livelihoods of millions of people across the value chains. 

The only segments, which are cheering the restrictions and calling for country-wide lockdowns are the trade unions, and fixed salaried people, led by over 1.5 million government servants.  Sustaining a labour force not engaging in productive work results in more government borrowings, both from domestic and foreign markets. It could also trigger runway inflation and make the entire population poorer than they were before the virus. Signs of high food inflation are already visible in the economy. 

Meanwhile, as of April 2021, Sri Lanka had US$ 157.4 million in total external liabilities for settlement and US$ 1,597.7 million during the three months from May through July including a billion dollar sovereign bond coming due on July 27. 

While worker remittance remains the only bright spot in the external sector of the economy, and merchandise exports to a lesser degree, the Central Bank recently emphasised the need for a functioning tourism trade in the new normal.