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Sri Lanka plans to cap forex risks of rupee bond investors through swap: Minister Cabraal

ECONOMYNEXT – Sri Lanka will offer to cap forex risks of investors in a bid to draw investors into rupee debt which will reduce the country’s dependence of international sovereign bonds and strengthen the external sector, State Minister for Finance, Capital Markets and State Enterprise Reform said.

“We want to encourage foreign investment in rupee bonds,” Minister Cabraal said. “To give comfort to investors we will provide a forward risk cover through a swap.

“Sri Lanka will be able to reduce its dependence on ISBs when we attract funds into rupee bond markets.”

Sri Lanka had almost 4 billion dollars worth foreign investments in rupee bonds sometime in 2014 but they had reduced over time to less than 12 billion rupees now.

Based on that trend Sri Lanka should have had around 7 billion dollars in rupee bonds now, he said.

“I think we can realistically attract about 3.5 billion US dollars over the next year which inflow would make a huge difference to Sri Lanka’s external account,” he said.

“When these foreign inflows start and gather momentum, our exchange rate will also strengthen, resulting in a very favourable impact on our public debt stock as well as debt servicing.”

Sri Lanka’s rupee tends to depreciate due to running monetary policy inconsistent with maintaining a pegged exchange rate regime, analysts have shown.

Sri Lanka’s rupee depreciated rapidly after 2015, under a so-called ‘flexible’ inflation targeting regime which involved pro-cyclical liquidity injections, coupled with real effective exchange rate targeting, sending the rupee down from 131 to 185 to the US dollar from 2015 to 2018.

Sri Lanka’s dollar denominated debt expands at each collapse of the peg and a subsequent fall in consumption slows economic output and drives up the deficit.

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There have been calls to reform the central bank to restrain its ability to engage in pro-cyclical liquidity injections and sterilize the balance of payments to maintain monetary stability.

The rupee is now stable despite an expanding budget deficit, amid weak private credit, despite a higher fiscal deficit. (Colombo/Sept09/2020)

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