High interest rate regime to remain until IMF deal clinched

Bingumal Thewarathanthri expects the current high interest rate regime to remain until the country secures the approval for US$ 2.9 billion bailout package from IMF executive board which is likely in March.
“Everyone is waiting when the rates are going to come down. The rates will come down only with IMF executive board level approval. When there’s a clarity on the haircuts that’s going to be borne by foreign bondholders, bilateral creditors and domestic creditors, then hopefully bond prices and interest rates will come down. But, don’t expect an easing cycle very soon,” he said.

Thewarathanthri speculated that the country is likely to receive IMF executive board approval for the US$ 2.9 billion bailout package at the IMF Executive board meeting scheduled in March.
“Specially, due to the domestic political transformation happening in China, reaching out to China and getting their consent before Christmas is very unlikely. There’s a process in China and this process might take up to January. The IMF executive board is meeting in March. So, if we get everything sorted out by January-February, then we can get IMF Board approval in March,” he added.

He pointed out that a possible local debt restructuring with a possible haircut is already factored into the government security yields.
“With the monetary policy tightening, T-bonds and T-bills reached over 30 percent. Today, you may be borrowing at 24-29 percent. So, it’s not sustainable. The reality is that there’s a haircut factored in T-bond and T-bill prices. So, the market is saying something,” he said.

With the Central Bank moving away from money printing in order to contain inflation, Thewarathanthri noted that there’s severe rupee deficit in the market.
“Even when you have the dollars, the government organisations sometimes don’t have rupees to buy the dollars. There’s a massive rupee shortage. With tax hikes coming into effect from December increasing revenue to the government, this will ease a bit in January,” he added.

For the next year, the government is planning to borrow Rs.1.8 trillion domestically to finance the projected Rs.2.8 trillion budget deficit. Standard Chartered Bank projects the government’s interest cost to rise to around Rs.800 billion next year which is more than the defense and public security expenditures combined.

“This is not sustainable. We as a bank are heavily pushing back on local debt restructuring,” Thewarathanthri   remarked.
According to him, the co untry is likely to see inflows of around US$ 1.3 billion from multilateral lenders next year, including initial tranche from the IMF.