Tue. May 24th, 2022

Sri Lanka is negotiating debt relief with international liaisons and is considering an approach to the IMF as the country struggles with a foreign reserve crisis that has left it close to default.

Finance Minister Basil Rajapaksa said in an interview with the Financial Times that the government is “negotiating with everyone” and “trying all our options” to avoid default and alleviate the economic crisis.

“We have [international sovereign bonds] which we have to repay, so we negotiate with them. “Then we have creditors and we have to service their debt, so whether we can have an adjustment or some type of thing,” he said.

Rajapaksa added that the government would “think of a program with the IMF. . . All those conversations continue as well. ”

Many investors think that Sri Lanka will become the latest to fail its sovereign debt during the pandemic, after people like Belize, Zambia and Ecuador. The country has nearly $ 7 billion in debt payments this year, but less than $ 3 billion in foreign reserves.

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

Rajapaksa insisted the government could do it, but prepared for contingencies. “I know it’s very difficult because we have to pay $ 6.9 billion this year and, in addition to that, we have to get money for medicine, raw materials, fuel, all that stuff,” he said.

Basil Rajapaksa, Sri Lanka's Finance Minister
Basil Rajapaksa, center, insists the country can do so despite dwindling foreign exchange reserves © Eranga Jayawardena / AP

The lack of foreign exchange reserves caused power outages and shortages of imports, including fuel and milk powder, which exacerbated double-digit inflation.

More than a third of Sri Lanka’s debt is owed to international mortgage holders and the country repaid a $ 500 million mortgage last week. Another $ 1 billion is due in July, but Dimantha Mathew, head of research at First Capital brokerage firm in Colombo, said the country may have run out of foreign exchange by then.

Its long-term dollar bonds are trading at less than half their face value, suggesting that foreign fund managers are speculating on how much they can recover in a restructuring rather than expecting full repayment.

Asked if he was negotiating a restructuring with mortgagees, Rajapaksa replied it was “something like that”. “You can, of course, understand what we want and you can understand what the mortgage holders want,” he added.

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

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

Sri Lanka has previously entered into 16 emergency relief programs with the IMF and even before the pandemic, investors became wary of its growing debt pile and meager tax revenues. It was further eroded when the Rajapaksa government reduce value added tax and other levies in 2019, which led to a cascade of credit rating downgrades to junk levels.

Sri Lanka has been shut down from debt markets while the pandemic-induced collapse in tourism and overpayments dramatically reduced the dollar inflow.

“Maybe with this Indian financing they can kick the gaze off a little longer,” says Carlos de Sousa, a portfolio manager at Vontobel Asset Management, which holds some Sri Lankan dollar bonds. “But even if they repay in July, it only delays the inevitable.”

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