Sri Lanka in talks for US$4-5bn pipeline of swaps, credits except IMF: Central Bank

ECONOMYNEXT – Sri Lanka is in talks for up to 5 billion US dollars of funding through swaps and loans outside of a program with the International Monetary Fund, and all debt falling due will be met, central bank officials said.

Governor W D Lakshman said required foreign exchange would be sourced from the market and gaps would be filled with swaps and loans.

“There are a number of negotiations going on, the details of which I am not going to come out, with overseas agencies to raise some of the required to raise foreign exchange inflows, through swaps and loans and that sort of mechanism,” Governor Lakshman said

“[There are] negotiations with overseas central banks, overseas banks and other agencies. Multilateral agencies are included though the IMF is not there in that list – yet.”

He said Sri Lanka was following a market oriented economy with state guidance, involving some controls and restrictions.

Such a framework would not be successful under an IMF program, he said.

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Deputy Governor Dhammika Nanayakkara said around 4 to 5 billion US dollars in potential funding was in the pipeline.

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The maturities ranged from around 1 to 8 years, and the price from 1 percent to around 6.5 to 7.0 percent.

Some of the funds would be precautionary.

“I do not say that the entire 4 to 5 billion is going to be utilized because as the Governor mentioned we will be looking at some of the requirements form the market as well,” Nanayakkara said.

Commercial banks were asked in late January to surrender about 10 percent of remittances converted to dollars by customers at market rates to the central bank.

In 2021 the central bank was targeting about 7.5 billion US dollars of remittances, up from 7.1 billion dollars in 2020.

“If 6 billion (dollars) has been converted to LKR that means 600 million is sourced from the market towards whatever obligation that is falling due,” he explained.

Analysts however had warned that rejection over-subscribed bids to Treasury auctions and turning inconvertible Treasury securities into convertible rupee bank notes by taking them into the central bank’s balance sheet will create forex shortages and make it difficult to general dollars.

Successful bond auctions at a market rate will crowd out imports through the domestic credit system and make dollars available to the Treasury. Injections would do the opposite.

Sri Lanka’s forex reserves had dropped to around 4.8 billion US dollar by January 2021 in the wake of the injections.

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Governor Lakshman said Sri Lanka would maintain its unblemished record in debt repayments despite ‘doomsday predictions’.

The doomsday predictions were based on what had happened in the second half of 2010 decade, involving high depreciation, high inflation and high deficits despite rhetoric claiming that there was fiscal rationalization, he said.

“These are all being changed and we expect better results,” Governor Lakshman said.

Analysts have pointed out that the 2015 – 2020 economic framework also failed due to injections made largely through open market operations and a failed attempt at inflation targeting while running a pegged exchange rate, which triggered currency crises and consumption collapses.

A publicly articulated real effective exchange rate targeting exercise also ensured that the exchange rate did not bounce back, when credit collapsed.

Analysts have also argued that in the guise of inflation targeting which requires a floating rate where the reserves money is unchanged Sri Lanka had been selling dollars to peg and had been over-sterilizing interventions to target a call money rate with excess liquidity.

It has been argued that instead of targeting inflation, Sri Lanka is targeting interest rates as a final target triggering currency shortages. (Colombo/Feb14/2021)

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