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Thursday March 23rd, 2023

China says it will discuss Sri Lanka debt re-structuring during two-year moratorium

ECONOMYNEXT – China’s Exim Bank has given Sri Lanka a two-year moratorium on its defaulted loans and will discuss additional re-structuring within the ‘window’ Foreign Ministry spokesperson Mao Ning has said.

The Export-Import Bank of China has sent a letter to Sri Lanka on January 19 saying installments including interest due in 2022 and 2023 would not have to be repaid.

“..[M]eanwhile, the Bank would like to have friendly consultation with Sri Lanka regarding medium- and long-term debt treatment in this window period,” she said.

“And the Bank will make best efforts to contribute to the debt sustainability of Sri Lanka. The Bank also noted that it will support Sri Lanka in its loan application to the IMF.”

The International Monetary Fund has so far not said the letter is in conformity for them to give a 2.9 billion US dollar loan to Sri Lanka and unlock loans from the World Bank, Asian Development Bank, Japan and others.

Bi-lateral creditors are not at this stage expected to give assurances setting pre-conditions such as a two-year grace period, but offer to re-structure debt in line with a financing envelop of the IMF program, according to those familiar with the process.

Based on leaked letter from India, creditors have to agree to limit repayments so that total foreign repayments and new financing does not exceed 4.5 percent of GDP from 2027 and the total including domestic does not exceed 13.5 percent.

It is not clear what the grace period would be to require a 4.5 percent ceiling or the GFN ceiling in the intervening period but the current level has topped 30 percent of GDP.

Bi-lateral creditors have to agree to re-structure the debt using a combination of grace, maturity extensions and or coupon changes to achieve the financing targets.

The exact details are worked out in a second stage after an IMF program is approved by the board.

Talks with private creditors commence after that and have to be wrapped up as fast as possible.

It is not clear whether as much as two years could be given to a bilateral lender to negotiate its debt.

China has also given loans to Sri Lanka through China Development Bank and it is not clear whether a letter from only the Exim Bank is sufficient or a letter covering all non-commercial loans are required.

The Exim Bank has financed Sri Lanka’s coal power plant, which the country’s auditor general has said is the higher return project implemented in the country since the hydro-electric dams of the 1980s. Even now the country’s economy is kept afloat by the coal plant.

Sri Lanka defaulted on its foreign debt in 2022 after suffering serial currency crises from 2015 under so-called flexible inflation targeting, despite operating a reserve collecting peg.

Under flexible policies money was printed to target inflation as high as 5 percent (about 250-pct of the level of stable countries) and for stimulus, bombarding the credit system with aggressive open market operations to mis-target interest rates until forex shortages emerge and the currency collapses repeatedly.

The country borrowed heavily from sovereign bond holders and also China as monetary instability during times of forex shortages rapidly ratcheting up foreign debt.

Market access countries as the US tightens monetary policy and and the countries recover from a Coronavirus crisis and monetary policy corrections are fatally delayed by high inflation targets, critics say.

The full statement of the spokesperson is re-produced below:

Mao Ning: On January 19, the Export-Import Bank of China, as the official bilateral creditor, provided a financing support document to the Ministry of Finance, Economic Stabilization and National Policies of Sri Lanka, saying the Bank is going to provide an extension on the debt service due in 2022 and 2023, which means Sri Lanka will not have to repay the principal and interest due of the Bank’s loans during the above-mentioned period, so as to help relieve Sri Lanka’s short-term debt repayment pressure; meanwhile, the Bank would like to have friendly consultation with Sri Lanka regarding medium- and long-term debt treatment in this window period; and the Bank will make best efforts to contribute to the debt sustainability of Sri Lanka.

The Bank also noted that it will support Sri Lanka in its loan application to the IMF; in the meantime, the Bank will continuously call on commercial creditors (including the International Sovereign Bondholders) to provide debt treatment in an equally comparable manner, and encourage multilateral creditors to do their utmost to make corresponding contributions.

As we have said several times, as a friendly neighbor and true friend, China has been providing assistance for Sri Lanka’s economic and social development to the best of our capabilities. The financing support document is aimed at combining an “immediate contingency measure” and “medium- and long-term debt treatment” to rapidly, effectively and truly resolve Sri Lanka’s debt issue. As far as I have learned, China is the first official bilateral creditor to have taken the initiative to announce debt extension to Sri Lanka. This speaks to China’s sincerity and action to support Sri Lanka’s effort to achieve debt sustainability.

China calls on all other creditors of Sri Lanka, especially multilateral creditors, to take synchronized, similar steps and give effective, strong support to Sri Lanka to help the country emerge from its default status at an early date and eventually work out an arrangement for Sri Lanka to achieve medium- and long-term debt sustainability. China also calls on the IMF to take into full consideration the urgency of the situation in Sri Lanka and provide loan support as soon as possible to relieve the country’s liquidity strain.

Going forward, China will continue to support relevant financial institutions in actively working out the debt treatment. We will work with relevant countries and international financial institutions to jointly play a positive role in helping Sri Lanka navigate the situation, ease its debt burden and achieve sustainable development.

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Sri Lanka establishes committee to investigate aircraft incidents

An aircraft lands at the Jaffna International Airport, which was opened in October 2019 and promises to push the tourism frontiers in Jaffna.

ECONOMYNEXT: Sri Lanka’s has established an expert committee under the state-run Civil Aviation Authority to investigate aircraft accidents and to implement precautionary methods in the Sri Lankan airspace, an Official said.

“Even if it is only one flight, there is a chance an accident may occur,” Civil Aviation Authority of Sri Lanka, Director General, P. A. Jayakantha said.

“This particular committee is there to investigate aircraft accidents and act as a mechanism to take over if something goes wrong”.

Sri Lanka has encountered around 2,700 minor aircraft accidents and incidents mostly on the ground in the 19 years through 2021, the CAA annual reports showed.

The new committee will analyze the past accidents and take precautionary measures while also conducting investigations and provide independent reports in the future, Jayakantha said.

The team is provided with required training and qualifications by the CAA along with an International organization, free of charge.

“Internationally also it is a requirement to have a team to investigate the aircraft accidents,” Jayakantha added.

“For a long time we have not fulfilled this requirement and that is why we established this team with the cabinet approval. Moreover, recently, Sri Lanka’s two aircrafts, one training aircraft and a commercial aircraft met an accident”

The committee will be on active duty, until the Accident Investigation Act is passed and a proper Aircraft Accident and Incident Investigation Bureau is established. (Colombo/ Mar23/2023)

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Sri Lanka bond yields steady, Rupee 319/325 at close

ECONOMYNEXT – Sri Lanka’s treasury bond yields closed steady on Thursday while rupee closed weaker, dealers said.

A 01.07.2025 bond closed at 30.60/31.00 percent on Tuesday, down from 30.25/75 percent on Wednesday.

A 15.09.2027 bond closed at 27.80/28.10 percent, steady from 27.90/28.00 percent from Wednesday.

Sri Lanka rupee closed at 319/325 against the US dollar depreciating from 318/320 from a day earlier. (Colombo/ March23/2023)

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Sri Lanka shares dive to two-week low on local debt restructuring fears

ECONOMYNEXT – The Sri Lanka market fell for a fourth session to a two-week low on Thursday, led by financials, as worries over domestic debt restructuring continued after the IMF loan was approved earlier this week resulting in investors adopting a wait-and-see approach until further clarity was provided, analysts said.

The main All Share Price Index (ASPI) closed down 1.38 percent or 131.07 points to 9,395.98, lowest since March 02.

Analysts said, majority of the banks have been on slower investment trends on fears of domestic debt restructuring after the IMF approval and waiting for more clarity on the local debt restructuring.

“The market is on muted sentiments despite the IMF loan being approved and is going through a period of consolidation,” Ranjan Ranatunga of First Capital Holdings said.

The market saw a net foreign outflow of 298 million rupees and the total offshore inflows recorded so far in 2023 to 3.3 billion rupees.

The most liquid index, S&P SL20, closed 1.64 percent, or 45.33 points, down at 2,722.94.

The market saw a turnover of 3.4 billion rupees on Thursday, above this year’s daily average of 1.8 billion rupees.

This is the highest turnover generated since March 08, which is when the market was driven off of positive sentiments from International Monetary Fund deal hope after Chinese assurances.

Top contributors to revenue was Agalawatte Plantations, on off board transactions of a stake change, contributing revenue of 1.6 billion rupees, Ranatunga said.

Top contributors to revenue industry wise was Food and Beverage and Telecommunications.

Sri Lanka Telecom has been seeing positive uptrends as the Secretary to the Treasury has informed the Board of Directors of Sri Lanka Telecom PLC (SLT) and Lanka Hospitals PLC that the Cabinet of Ministers has granted approval in principle for the divestment of the stakes held by the Treasury Secretary in the two companies.

Top losers were Sampath Bank, Hatton National Bank and Commercial Bank.

Sri Lanka is looking at options to re-structure domestic debt, or local law local currency debt (LLLC), without harming the banking sector and announce them the International Monetary Fund said in a report.

Banks have been witnessing profit taking and selling pressures after continuous uptrends prior to the IMF loan had been approved.

Analysts said, selling pressures is expected to ease as the IMF hopes to reduce inflationary pressures which will in turn lead to reductions in interest rates. (Colombo/Mar23/2023)

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