ECONOMYNEXT – Sri Lanka has reclassified 2.2 billion US dollars of international sovereign bonds held by local entities like banks as domestic debt, while a collapse in secondary market prices of bonds also reduced external debt due to accounting treatment, official data show.
Sri Lanka’s external debt also fell in 2020 based on standard accounting treatment of ISBs by their secondary market value, though a face value liability remains.
Sri Lanka’s banks bought into ISBs in 2020 as market prices collapsed in the wake of a credit downgrades driven from a sudden tax cut and monetary instability.
Banks were then barred from purchasing as fresh money printing led to more forex shortages.
Out of outstanding 14,050 million dollars of ISBs issued, 2,230 million was held by domestic entities by end 2020, up from 1,113 million in 2019, the central bank said.
Central Bank officials have said that around 300 million US dollars of billion US dollar ISB falling due in July 2021 was now held by domestic entities.
In 2020, out a billion US dollar bond repaid, about 859 million had been held by foreigners the balance by locals.
Meanwhile rupee securities held by foreigners declined to almost nothing as most of the remaining foreigners left. Treasury bond holdings fell from 406 million US dollars in 2019 to 31 million dollars in 2020 by book value.
Sri Lanka has been hit by an unusually non-credible pegged regime with dual anchors involving ‘flexible’ inflation targeting conflicting with a ‘flexible’ exchange rate which triggered multiple currency crises, triggering capital flight.
The foreign debt of Sri Lanka’s central government was 28.2 billion US dollars in 2020 down from 34.2 billion US dollar in 2019 partly helped by repayments of loans and debt securities.
However a part of the drop also came from accounting treatment of ISB by their secondary market price.
“However, it must be noted that in spite of the reduction in the market price of ISBs that is taken in to consideration in arriving at this computation, the actual liability in terms of outstanding ISBs remains higher at their face value,” the central bank said in a cautionary note.
ISBs which were valued at 14.1 billion US dollars by end 2019 were now listed as having a carrying value of 7,613 million dollars.
Sri Lanka however can potentially get part of the benefit by repurchasing the bonds.
Sri Lanka had 20.57 billion dollars of central government foreign debt, while the central bank owed another 1.38 billion US dollars to the International Monetary Fund by the year end. State enterprises owned another 4.2 billion US dollars.
In 2020 Sri Lanka repaid a the equivalent of 83 billion rupees worth net foreign debt as part of financing the budget as the entire gap was financed locally due reduced access to foreign financing.
A part of the financing (at least 505 billion rupees) came from printed money, triggering a 2.3 billion US dollar balance of payments deficit. In forex reserve collecting pegged regime, liquidity injections triggers a BOP deficit by preventing a required slowdown in domestic credit.
The deficit was listed as 11.1 percent of GDP by time shifting 2.9 percent of borrowing to 2019. (Colombo/May07/2021)