Foreign investors acquired over $100 million worth of Sri Lanka’s government securities during the last 15 weeks of 2024, despite net selling throughout the year, according to Central Bank data.
This surge reflects growing confidence in the nation’s economic trajectory, underpinned by deflationary policies and expectations of further interest rate cuts.
Sri Lanka has adopted stringent deflationary measures and import restrictions while lowering interest rates after inflation peaked at a staggering 70% in 2022.
According to currency dealers in Colombo foreign investors are optimistic about a possible 100 basis points reduction in policy rates by the Central Bank, spurring their recent activity.
The week ending December 26 witnessed an inflow of 2.71 billion rupees ($9.3 million), adding to a total of 29.9 billion rupees ($103.1 million) of inflows into treasury bonds and bills over 15 weeks.
By December 26, foreign holdings of government securities were valued at 69.3 billion rupees. However, the year overall saw outflows of 48.2 billion rupees, with foreign investor holdings dropping from 117.4 billion rupees at the start of 2024 to 69.3 billion rupees by year’s end.
Analysts attribute these inflows to effective deflationary policies, despite challenges like a 66% outflow (78.1 billion rupees) in the year’s first nine months.
The government, led by President Anura Kumara Dissanayake, has emphasized transparency and pledged to combat entrenched corruption since assuming office in September.
Sri Lanka’s ongoing economic restructuring, following its first-ever sovereign default in 2022, has drawn global attention.
The nation defaulted on $12.5 billion in debt after a currency crisis triggered by COVID-19 disruptions and price surges caused by Russia’s invasion of Ukraine. These shocks led to acute shortages of food, fuel, and medicines, exposing deep governance issues.
The restructuring includes innovative governance-linked bonds aimed at incentivizing improved financial management and transparency.
Under this arrangement, Sri Lanka’s coupon rates, starting at 3.6%, could rise to 9.25% by 2032 if governance targets are not met.
Achieving these goals could save the government $80 million in interest payments. Experts consider this instrument precedent-setting, offering a model for integrating accountability into debt management.
However, the restructuring has introduced six new bond instruments, including macro-linked and past-due interest bonds, making the process complex. Bond prices recently dropped by up to 3 cents per dollar as some investors sold holdings to avoid dealing with intricate instruments.
The long-term success of governance-linked bonds could determine their wider adoption. As Giulia Pellegrini of Allianz Global Investors observed, their tradeability and pricing will hinge on Sri Lanka’s performance, offering lessons for global debt restructuring initiatives.
