Sri Lanka is negotiating debt relief with international bondholders and mulls an IMF approach, as the country grapples with a foreign reserves crisis that has left it close to default.

Basil Rajapaksa, finance minister, told the Financial Times in an interview that the government was “negotiating with everyone” and “trying all our options” to avoid default and ease the economic crisis.

“We have [international sovereign bonds] that we have to repay, so we negotiate with them. Then we have creditors and we have to service their debt, so if we can have an adjustment or something,” he said.

Rajapaksa added that the government “would consider a program with the IMF. . . All of these discussions are ongoing as well.

Many investors believe Sri Lanka will be the last to default on its sovereign debt during the pandemic, after Belize, Zambia and Ecuador. The country has nearly $7 billion in debt payments due this year, but less than $3 billion in foreign exchange reserves.

Some Sri Lankan officials have insisted the country can avoid this fate by increasing its foreign exchange reserves through tourism and exports while securing additional aid from China and India, two of its biggest benefactors. . The central bank governor told CNBC this week that “we don’t need help” from the IMF.

Rajapaksa insisted the government could manage but was preparing for eventualities. “I know it’s very difficult because we have to pay this year 6.9 billion dollars and, in addition, we have to find money for medicines, raw materials, fuel, all these things. “, did he declare.

Basil Rajapaksa, center, insists the country can manage despite dwindling foreign exchange reserves © Eranga Jayawardena/AP

Lack of foreign exchange reserves caused power cuts and shortages of imports, including fuel and powdered milk, which exacerbated double-digit inflation.

More than a third of Sri Lanka’s debts are owed to international bondholders and the country repaid a $500 million bond last week. Another billion dollars is due in July, but Dimantha Mathew, head of research at First Capital Brokerage in Colombo, said the country could already be short of foreign currency by then.

Its long-term dollar bonds are trading at less than half face value, suggesting overseas fund managers are speculating on how much they could recoup in a restructuring rather than expecting to be reimbursed in full.

When asked if he was negotiating a restructuring with bondholders, Rajapaksa said it was “something like that”. “Obviously you can understand what we want and you can understand what bondholders would like to have,” he added.

Sri Lanka has also turned to India and China for help. New Delhi has provided nearly $1 billion in aid and is negotiating to provide further aid. Beijing last month provided a renminbi currency swap worth $1.5 billion, though analysts said it was unlikely it could be used to pay off dollar-denominated debt.

President Gotabaya Rajapaksa, the finance minister’s brother, has also asked China to restructure its loans, which have ballooned to more than 10% of Sri Lanka’s external debt burden. Many say Chinese credit has exacerbated the crisis by being used for large, unnecessary infrastructure projects with little return.

Sri Lanka has already concluded 16 aid programs with the IMF, and even before the pandemic, investors were beginning to be wary of its growing debt and meager tax revenues. These were further eroded when the Rajapaksa government reduced value added tax and other levies in 2019, leading to a cascade of credit rating downgrades to undesirable levels.

Sri Lanka was squeezed out of debt markets as the pandemic-induced collapse in tourism and remittances led to a dramatic drop in dollar inflows.

“Maybe with this Indian funding they can run the box a bit longer,” said Carlos de Sousa, portfolio manager at Vontobel Asset Management, which holds Sri Lankan dollar bonds. “But even if they repay in July, it only delays the inevitable.”

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