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Sri Lanka denies plan to delay domestic dollar loan repayments, SLDBs

ECONOMYNEXT – Sri Lanka’s central bank has denied that repayment of forex loans taken from local banks and dollar denominated domestic bonds falling due will be delayed as the country faced foreign exchange shortages and a foreign reserve drain amid money printing.

“The Central Bank wishes to inform investors and the general public that debt service payments, interest and capital, are being met in a timely manner on account of SLDBs (Sri Lanka Development Bonds) and Foreign Currency Loans from Domestic Banks, as well as all other debt obligations of the Government,” the central bank, which manages debt for the Finance Ministry as its agent said in a statement.

“The Government has no intention to tarnish its unblemished debt service record by delaying the settlement of maturing debt obligations.

“So far, during 2021, on account of SLDBs and Foreign Currency Loans from Domestic Banks, debt service payments of close to United States Dollars 1,200 million have been met, and all due obligations will also be serviced in a timely manner.’

The central bank said the “general public are advised not to get unduly concerned about” such reports.

Sri Lanka’s The Sunday Times newspaper reported that authorities had discussed delaying repayment of dollar loans from domestic banks and Sri Lanka Development Bonds, a dollar security mostly sold to domestic investors, for a year, to meet commitments for International Sovereign Bonds.

Sri Lanka has to repay a billion US dollar International Sovereign Bond in July 2021, as well as meet coupons of about 14 billion outstanding ISBs.

Of the billion dollar bond, about 300 million dollars is owned by domestic holders, the central bank has said. Sri Lankan banks have bought into sovereign bonds at steep discounts.

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In May a 693 million SLDB is due and in June a 158 million SLDB is due.

Sri Lanka’s sovereign rating was downgraded to ‘CCC’ in 2020 amid money printing and a weakening of the exchange rate. Delays of debt could push the rating in a country to restricted default category or RD analysts say.

Sri Lanka’s gross official reserves fell to 4,583 million US dollars in February 2021 from around 8.5 billion US dollars in August 2019, when liquidity injections began to target an output gap.

Sri Lanka is expecting save money from inflows in 2021 to repay debt falling due.

Analysts have warned that Sri Lanka will have to maintain solvency in domestic debt markets (sell Treasury bills to banks and the public at a market interest rate and get already existing money instead of printing money and expanding the monetary base) to maintain solvency in dollar debt repayments.

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Expanding the reserve money through liquidity injections to keep interest rates down creates forex shortages and forces a peg with the US dollar to break.

The rupee has fallen to around 200 to the US dollar so far this year amid liquidity injections despite the worst import controls since the 1970s. (Colombo/Apr03/2021)

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