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Sri Lanka caught in a Rs. 3 trillion debt trap

Sri Lanka is in a catch-22 situation of tackling massive public debt restructuring in the next three months with an unprecedented debt load of Rs.3.05 trillion for 2020, surpassing the earlier estimate of Rs. 2 trillion, official data showed. In light of urgent and unforeseen requirements arising from the COVID-19 pandemic, the increase in debt stock to over Rs.3 trillion compared to Rs.1.3 trillion in 2019 is unavoidable, a senior Treasury official said.

With about half that amount of debt made up of foreign repayments, the Finance Ministry is working out plans to meet payments and raise money attracting foreign inflows for rupee bonds with forex caps without relying much on international sovereign bonds, he added.

In addition, Central Bank holdings of government securities and other data on Central Bank open market operations revealed a significant direct monetary financing of the deficit. This will add to the sum of government borrowings.

Sri Lanka will under no circumstances dishonor debt obligations, he said, stating that debt servicing will be possible even under a difficult financial situation.

The government has moved and passed a resolution in parliament to raise the borrowing limit to Rs.1.3 trillion on August 27 and another sum of Rs.75 billion the following day raising the borrowing limit to an additional sum of Rs. 2.05 trillion this year.

Sri Lanka’s dollar bonds have not performed up to expectations with a weak position among the sovereign frontier markets in Asia that have been able to raise offshore debt, he disclosed.

Foreign reserves amounted to US$ 6.9 billion in August 2020, compared with US$ 6.6 billion in the previous month.

The current foreign reserve level is low relative to sovereign external debt that is due by the end of this year, an economic expert said pointing out that servicing foreign borrowings will not be an easy task.

External debt service amounts to around US$ 3.8 billion from June to December 2020, including a US$ 1 billion international sovereign bond payment due in October.

The government will be facing difficulties in securing foreign funds under the present global financing conditions amidst COVID-19, the expert said.

However, the Central Bank is optimistic about raising US$ 1.5 billion each from India and China in the form of currency swap lines and a US$ 300 million loan from the ADB.

If the country will be able to secure 100 percent bilateral and multilateral financing under negotiation (including the US$ 800 million rapid financing instrument from the IMF), the foreign reserve position will rise up to US$ 7.8 billion, they predicted.

But if the Central Bank fails to secure foreign financing, then the reserves will fall to US$ 3.7 billion and the government will find it difficult to avoid default, he said.

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