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Sri Lanka readies to repay a US$ 500 million ISB by January 18 deadline

Sri Lanka is set to repay a US$ 500 million International sovereign bond by the January 18 deadline, keeping intact its reputation for honoring debt as concern mounts about the nation’s overseas financing.

Central Bank Governor Ajith Nivard Cabraal announced that the CB has allocated the forex required for the $ 500 million International Sovereign Bonds (ISB) that is maturing on January 18. 

In a tweeter message he said it is a shame that some investors lost out due to the organized negative stories spread by certain vested interests.

 Unfortunately some bondholders panicked due to rating actions and analyst reports and sold off at huge discounts,” Cabraal said adding that those who will  come  last profited most.”

The payment marks the clearing of only the first test. One more payment – in addition to a $500 million bond, a $1 billion of debt — became due this year, with the Central Bank assuring that  arrangements have been made for the transaction.

He said the funds to repay the bond have already been earmarked. The Government currently holds only about $ 3.1 billion in foreign reserves. 

Of these, less than a billion dollars are in liquid dollar reserves that can be used to repay foreign loans and installments. The central bank expects to get some of the funds back into reserves via swaps, Governor Cabraal said.

The central bank had also got some dollars paid out by the Treasury sovereign bonds to maturing bonds back through swap transactions.Sri Lanka’s forex reserves fell to $1.58 Billion in October last year. 

However the central bank has advanced about $160 million to domestic state banks, which is not counted as foreign reserves because the asset is domestic.

Sri Lanka is working on central bank loans, asset sales and credit lines to shore up reserves.

Downgrade on Rising Default Probability: The downgrade of Sri Lanka’s Foreign-Currency Issuer Default Rating (IDR) to ‘CC’ from ‘CCC’ reflects increasing pressure on the country’s foreign-exchange reserves from large external debt redemptions, which raises the probability of a default event. 

Reserves have fallen steeply since August 2021 due to a higher import bill and central bank intervention to support the currency, Fitch ratings agency said.

 Scheduled foreign-currency debt servicing in 2022 is equivalent to 430 pecent of end-November 2021 foreign-exchange reserves, it calaimed.  

Substantial Debt Repayments: Cumulative foreign-currency debt-servicing payments between 2022 and 2026 amount to about $26 billion.

 Sri Lanka’s 1Q22 foreign-currency debt repayments, of about $ 3 billion, are alone nearly 188 of reserves. 

This includes an international sovereign bond (ISB) repayment of $500 million around mid-January 2022.

Funding Options Narrowing: External financing options are limited, reflected in the authorities’ reliance on external bilateral support and swaps with central banks to meet funding needs for 2022. 

The timing of these flows materialising and their ready availability for debt servicing are unclear. Fitch Ratings believes that, even if these flows are secured, maintaining sufficient external liquidity for uninterrupted debt servicing will be challenging for Sri Lanka.

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