Economy

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

Saturday February 4, 2023 7:59 am

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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Markets

Sri Lanka’s shares slip on profit taking and selling pressure

Wednesday June 7, 2023 5:18 pm

ECONOMYNEXT – Sri Lanka’s shares closed lower on Wednesday after four consecutive gains in previous sessions spiraled into selling interest and profit taking, an analyst said.

The main All Share Price Index was down 0.28 percent or 24.39 points to 8,722.06, this is the lowest the index has been since May 02, while the most liquid index S&P SL20 was down 0.40 percent or 9.92 points to 2,468.44.

“The market was gaining in the previous sessions and there is selling and profit taking present today, due to continuously being on green,” an analyst said.

In the previous sessions the market was seeing gains, due to lowered policy rates and low inflation stimulating buying interest and driving the sentiment up, an analyst said.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

“There are gradual improvements in the market sentiment, with positive sentiments coming in from lowered policy rates and inflation,” an analyst said.

The market generated foreign inflows of 12 million rupees and received a net foreign inflow of 18 million rupees, due to low share prices and discounted shares followed by a dividend announcement.

The market generated a revenue of 554 million rupees, this is the lowest the turnover has been since May 10, while the daily turnover average was 1 billion rupees. From the total generated revenue, the banking sector contributed 120 million rupees, Diversified Banks contributed 115 million rupees and the Capital Goods Industry generated 78 million rupees.

Top losers during trade were Sampath Bank, Commercial Bank and Aitken Spence. (Colombo/June06/2023)

Bonds & Forex

Sri Lanka Treasuries yields plunge, 12-month down 318bp

Wednesday June 7, 2023 4:04 pm

ECONOMYNEXT – Sri Lanka’s Treasuries yields plunged across maturities at Wednesday’s auction with the 12-month yield falling 318 basis points, in one of the biggest one day falls, data from the state debt office showed.

The 3-month yield fell 244 basis points to 23.21 percent.

The 6-mont yield fell 339 basis points to 21.90 percent, along with the 12 months to 19.10 percent.

The short-term yield curve is inverted.

The central bank last week cut its policy rate 250 basis points in a signaling move but is not printing money to enforce the rate cut.

The debt office sold all 140 billion rupees of offered securities. (Colombo/June07/2023)

Bonds & Forex

Sri Lanka forex reserves rise US$722mn in May 2023

Wednesday June 7, 2023 3:48 pm

ECONOMYNEXT – Sri Lanka’s foreign reserves grew 722 million US dollars to 3,483 million US dollars in May 2023 from 2,761 million US dollars in April, official data showed amid weak credit and better inflows.

Sri Lanka lost almost all its reserve in over two years as the central bank sold reserves and printed money to keep rates down (sterilized reserves sales) including borrowed dollars from India.

Gross official reserves fell to a low of 1,705 million US dollars in September 2022.

Sri Lanka’s central bank hiked rates in April 2022 to slow credit and also stopped printing money after it ran out of borrowed Asian Clearing Union dollars from India.

Sri Lanka’s gross official reserves are made up of both monetary reserves of the central bank and any balances of the Treasury account from loans or grants it gets.

The central bank’s net foreign reserves are still negative after busting up borrowed reserves to suppress rates. By April (before the collection of reserves in May) the central bank’s net reserves were negative by 3.7 billion US dollars.

In May alone 662 million US dollars were bought from the market, Central Bank Governor Nandalal Weerasinghe said.

Borrowing dollars through swaps and busting them up, was invented by the US Federal Reserve as it was printing money and breaking the Bretton Woods system in the early 1970s.

Sri Lanka received a 350 million US dollar tranche from the Asian Development Bank and 331 million US dollars from the IMF to the Treasury for budget support.

The loans can be sold to the central bank by the government to generate rupees and spend. However, since credit is weak, not all the inflows go out of the country particularly as the central bank is conducting deflationary open market operations on a net basis.

By allowing the rupee to appreciate unlike in previous episodes of recovery in an IMF program, after a bout of money printing, the central bank is bringing down inflation – in some cases absolute prices – and restoring confidence and easing the ‘pain’ of ‘monetary policy’ or stimulus.

Related

Why is Sri Lanka’s rupee appreciating?

Though exports are falling, tourism revenues are also picking up.

The budget support loans, tourism receipts less the reserve collected will widen the trade deficit. Building foreign reserves involves lending money to the US or other western nations and is similar to repaying foreign debt. (Colombo/June07/2023)