Foreigners flock back to rupee bonds amid renewed interest

Foreigners sharply increased their holdings in rupee bills and bonds in the few weeks up to the approval of the deal with the International Monetary Fund (IMF) as they were seen growing confident over the turnaround story of the Sri Lankan economy in the medium term. 

Foreigners who offloaded a record sum of rupee bonds since the good governance regime came to power in 2015 and deepened the rout during the pandemic, returned with a bang piling back over Rs.17.2 billion worth of Treasury bills and bonds in the last two weeks. 

This marked a 33.4 percent jump from a fortnight ago and most in the recent history. 
With the recent piling up of rupee bonds, foreigners held a cumulative Rs.68.82 billion rupee equivalent bills and bonds by the end of March 23. 

Speaking at a virtual forum organised by the Centre for Banking Studies of the Central Bank last week in the aftermath of the IMF Board approval, former Central Bank Governor Dr. Indrajith Coomaraswamy said the IMF Board approval could spark renewed interest among foreign investors in Sri Lankan treasuries and equities.

The IMF Board approval will open up multiple bilateral and multilateral funding lines for Sri Lanka to tap billions more in foreign currency loans which are integral in rebuilding the foreign reserves position of the country. 
The debt deferment which could span up to 10 years offers Sri Lanka a golden opportunity to rebuild its external reserve buffer well beyond US$ 10 billion by next year, a level which will provide Sri Lanka a bulwark against global shocks in the scale of the pandemic in 2020 and 2021. 

The Sri Lankan economy fell into trouble last year due to two years of pandemic related restrictions, which cut off the much needed foreign inflows to the tune of approximately US$ 20 billion. 
Also, the steeper tax cuts that were introduced in 2019 contributed towards Sri Lanka’s economic downfall. At the time they were introduced, rating agencies identified them as ‘credit negative,’ even though there were no signs of a pandemic at the time.