By: Staff Writer
October 16, Colombo (LNW): In a move that revives a controversial strategy initiated by the previous administration, Sri Lanka’s new government led by the National People’s Power (NPP) has approved the sale of foreign currency denominated bonds to the domestic market. Cabinet Spokesman Dr. Nalinda Jayatissa confirmed that the Treasury plans to issue dollar bonds worth around USD 100 million, targeting maturities between one to three years.
The decision comes as the government struggles to manage a tight external financing position, with limited access to global capital markets following the 2022 sovereign default. According to Treasury sources, the move aims to tap into idle foreign currency deposits held in the local banking system estimated at over USD 8 billion—as a means to settle part of the upcoming foreign debt maturities while easing pressure on the exchange rate.
A Revival of a Past Policy
The initiative echoes the previous regime’s Sri Lanka Development Bonds (SLDB) program, which attracted local dollar holdings to finance external debt. That program, however, saw diminishing investor appetite due to rising risk premiums and poor secondary market liquidity. Analysts note that the new NPP government is effectively rebranding the concept while promising better structuring, transparency, and investor protections.
“The idea itself is not new,” said a senior financial analyst. “But if properly structured—perhaps through syndicated arrangements with reputed lead managers—it could offer the state short-term relief without excessive reliance on money printing or dollar borrowings abroad.”
Potential Benefits
Economists view the domestic dollar bond initiative as a pragmatic, if limited, solution to the country’s financing bottlenecks. By sourcing foreign exchange internally, the government could reduce pressure on reserves and the rupee, while avoiding the higher costs associated with borrowing from external markets.
Latest Central Bank data shows that as of August 2025, Sri Lanka’s gross official reserves stood at USD 5.2 billion covering about 3.2 months of imports while the government faces foreign debt service obligations of over USD 4 billion in 2026. Mobilizing local dollar liquidity could therefore help bridge near-term funding gaps.
Risks and Concerns
However, the move is not without risk. Financial experts warn that dollar-denominated borrowings, even from domestic sources, could increase the state’s exposure to currency risk. If the rupee depreciates further, the cost of servicing such debt could surge, deepening fiscal vulnerabilities.
Moreover, the domestic banking sector’s exposure to government securities—already exceeding 40 percent of total assets—could expand further, tightening liquidity and heightening systemic risk. Some also argue that attracting dollar deposits into government paper might drain foreign exchange from trade finance and private investment, potentially dampening economic recovery.
Balancing Act Ahead
The NPP government’s decision reflects a delicate balancing act: stabilizing the fiscal position without derailing macroeconomic progress achieved under the IMF program. The IMF’s Fourth Review (September 2025) cautioned Sri Lanka against expanding foreign currency liabilities unless backed by credible debt management and reserve-building strategies.
Ultimately, success will depend on investor confidence and market perception. If well-managed, the revived dollar bond issuance could serve as a temporary financing tool. But if poorly executed, it risks repeating past mistakes trading short-term relief for long-term fragility in Sri Lanka’s debt-laden economy.
