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Wednesday February 1st, 2023

Sri Lanka still believes domestic debt re-structure is not required: Minister

ECONOMYNEX T – Sri Lanka still believed that its economic plan required no domestic debt re-structure State Minister for Finance Shehan Semasinghe told parliament as interest rates remained elevated over fear of a rupee debt default.

A domestic debt re-structure will hit banks, the Employees Provident Fund and inflation was also high, he said.

“So that is why until the bilateral creditor discussions are over, we will not take a decision,” he told parliament.

“But we believe through these our plan of action (weda piliwela) there will be no need to restructure domestic debt.”

Sri Lanka has to re-structure because debt has been deemed ‘unsustainable’ and partly because annual rollover (Gross Financing Need) has topped 35 percent of GDP which is considered too high.

However large volumes of rupee debt are held in the hands of the Employees Provident Fund, which has no option but to roll-over, while the real value of debt has collapsed due to an inflating economy.

Banks are also required to hold government debt as part of their liquid reserves.

Sri Lanka lost the ability to repay foreign debt or make imports, after two years of money printing to suppress interest rates created forex shortages and sovereign bond holders refused to roll-over debt and country got locked out of capital markets as rating agencies downgraded the country.

Sri Lanka’s growth slowed after the end of a 30-year war as intensified monetary activism (liquidity injections to target an output gap) under discretionary ‘flexible inflation targeting’ led to serial currency crises accompanied by output shocks, and a spike in foreign borrowings.

Sri Lanka’s rupee collapsed from 113 to 360 through currency crises of 2012, 2015/16, 2018 and 2020/22, though net foreign debt started to ratchet up mostly from 2015 after the IMF taught the country to calculate an ‘output gap’ encouraging inflationary policy to close the gap.


How Sri Lanka’s IMF-backed ‘Young Plan’ fired a foreign debt death spiral

In the 2022/22 crisis – where taxes were also cut claiming there was a ‘persistent output gap’ the central bank not only ran down also its reserve but became a net borrower. (Colombo/Nov22/2022)

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Sri Lanka bond yields down at close

ECONOMYNEXT – Sri Lanka’s bond yields were down at close following a bond auction on Wednesday, dealers said while a guidance peg for interbank transactions remained unchanged.

“The rates were steady at the auction,” a dealer said.

“This can be a signal to the market saying the rates will go down in the future.”

A bond maturing on 01.07.2025 closed at 32.40/60 percent, down from yesterday’s 32.60/85 percent.

A bond maturing on 01.05.2027 closed at 29.10/35 marginally down from yesterday’s 29.20/75 percent.

The Central Bank’s guidance peg for interbank US dollar transactions remained unchanged at 362.14 rupees against the US dollar.

Commercial banks offered dollars for telegraphic transfers at 371.38 rupees on Friday, data showed. (Colombo/Feb 01/2022)

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Sri Lanka bill auction hits pothole after 2025 bond spike

ECONOMYNEXT – Sri Lanka sold only 45 billion rupees in Treasury bills at Wednesday’s auction after offering 120 billion rupees, data from the state debt office showed, amid market confusion over a spike in a two year bond at an earlier action.

30.1 billion rupees of 3-month bills were sold at 29.91 percent, unchanged from a week earlier after offering 60 billion rupees for auction.

5.1 billion rupees of 6-month bills were sold at 28.72 percent, flat after offering 30 billion.

10.3 billion rupees of 12-month bills were sold at 27.72 percent after offering 30 billion.

Phase II subscriptions have been opened.

The market was foxed after the 2025 bonds were accepted at sharply higher yield than market on January 30, dealer said.

There was further confusion as the there was an outright purchase of 2025 at around 29 percent earlier in January.

Some investors speculated that the authorities were trying to drive more buyers towards short end bonds as bill volumes were getting larger. (Colombo/Feb01/2023)

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Sri Lanka services exports down 5.9-pct in 2022

ECONOMYNEXT – Sri Lanka’s services exports were estimated to have fallen 5.9 percent to 1,876.3 million US dollars, the island’s Export Development Board said.

Services exports estimated is made up of ICT/BPM, construction, financial services, transport and logistics.

There are more than 500 ICT companies, the EDB said.

Sri Lanka’s merchandise exports were up 4.6 percent to US dollars 13.1 billion dollars in 2022 from 2021.

Sri Lanka’s goods exports are slowing amid lower growth in Western markets. (Colombo/ Feb 01/2023)

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