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Sri Lanka has US$3.5bn in external debt to repay in 2021; ISB partially owned by residents

ECONOMYNEXT – Sri Lanka has about US$3.5 billion US dollars of foreign currency denominated debt to repay from March to December 2021, and the balance is owned by resident holders, officials said.

Sri Lanka began the year with about 6.8 billion US dollars of forex denominated debt due in 2021 of which about 2.5 billion dollars were domestically owned, Superintendent of Public Debt M Z M Aazim said.

These include Sri Lanka Development Bonds and loans taken from the foreign currency banking units of domestic banks.

At the beginning of the year there was 4.15 billion US dollars of foreign owned debt, he said.

About 550 to 600 million dollars of I had been repaid by March.

Most of the domestic loans are expected to be rolled over, officials said.

Sri Lanka will pay all dollar obligations in US dollars, Treasury Secretary S R Attygalle said two weeks again.

Sri Lanka will not default on its debt obligations and will settle payments, officials have said.

One of the large tranches due to be paid this year includes a billion dollar international sovereign bond.

Out of the bond about 300 million dollars were found to be owned by domestic banks, Director of Economic Research Chandranath Amarasekara said.

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Sri Lanka has since barred domestic banks from buying sovereign bonds.

If banks use their rupee reserves to buy bonds instead of giving domestic loans, interest rate may rise, credit will reduce (crowded out) and imports will be automatically curtailed and the country’s external current account ma also narrow.

However in Sri Lanka there is excess liquidity from money printing or rupee reserves inserted to banks by the central bank acquiring Treasuries inflating the monetary base.

When the excess liquidity is use to buy dollar there is pressure on the spot US dollar rate as there is no crowding out of domestic credit, analysts say. Under current monetary arrangement, any recovery in the domestic economic activities and credit, is likely to trigger more instability, analysts have warned.

There was also pressure on the spot rate in January as banks bought spot and gave forward cover as forward premiums inverted as money printing pushed interest rates down despite a steady outflow from the financial account.

Higher dollar yields came partly from the purchase of ISBs and partly from repayment of foreign credit lines of banks after Sri Lanka’s sovereign downgrade, industry officials said. (Colombo/Mar08/2021)

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