Sri Lanka lined up for over $2B ‘bridging finance’ options

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Sri Lanka needs a minimum USD 2 billion and perhaps up to USD 3 billion for the rest of this year to fill its essential external payments gaps, a spokesman for the Ministry of Finance told Finance Today.

He said that the official foreign reserves that could be used to cover such payments are currently zero or negative.

Due to this situation the Central Bank has to fulfill its essential external payment gaps via expensive short term swap facilities with the local banking sector that receive foreign funds via regular export proceeds and remittances.

The Government has suspended servicing its foreign loan instalments and interest payments due to the deepening economic crisis and severe lack of foreign exchange.

Sri Lanka has also made an announcement on government’s intention to restructure all external sovereign debt and seek International Monetary Fund (IMF) assistance to commence negotiations for debt restructuring with creditors.

Thus, it is on the basis of action underway with the IMF, that Sri Lanka seeks short-term bridging finance from official creditors. The duration of such finance would normally be until longer term finance becomes available from the IMF after debt restructuring agreements are reached with existing creditors.

The Ministry of Finance spokesperson said talks were underway to obtain the bridging finance via IMF, World Bank as well as India, China and Japan.

Sri Lanka hoped to receive about USD 395 million from the emergency relief fund of the IMF and another USD 180 million under its traditional aid programme focused on member countries.

He said that discussions are being held in this regard and the relevant balance of payments (BOP) assistance could be obtained within the next two months based on its success.

In addition, the Government expects another USD 400-600 million in assistance from the World Bank via funding available for social security projects. It also has the potential to raise USD 50-75 million within a short period.

The MoF spokesperson pointed out that the Government expects another USD 500 million from India for fuel imports. Talks are also underway to obtain another USD 500 million from India for other essential imports.

Among other efforts taken by India, the Reserve Bank of India (RBI) is considering the deferment of a total of USD 2.5 billion of payments due this year by Sri Lanka via the Asia Clearing Union (ACU), a government spokesman told Finance Today. Accordingly, an agreement has been reached to defer payment of around USD 900 million due in January and March this year. Some USD 2.5 billion in ACU payments are due in January, March, May, July and September this year.

The International Sovereign Bond repayment of USD 500 million on 18 January 2022 was made possible only through the very timely SWAP of USD 400 million with the RBI and the deferral of a payment of USD 500 million to India under the Asian Clearing Union (ACU). Both of these short-term interventions played a critical role. The former is a three-month facility, which can be renewed twice (i.e., nine months) before the requirement of at least a staff-level agreement with the IMF.  India already granted a USD 1 billion line of credit to Sri Lanka as part of its financial assistance to help the country deal with its economic crisis and also a USD 500 million loan to finance urgent oil purchases.

Indian Finance Minister, Nirmala Sitharaman and a top level Indian Economic delegation also met Finance Minister Sabry at IMF Headquarters in Washington on 18 April. Minister Sitharaman assured Minister Sabry of their fullest support for Sri Lanka to move forward and has emphasised India’s commitment to strengthen the development of the economy in Sri Lanka and build stronger bonds between the two nations as they move forward together.

She also affirmed to Minister Sabry that India will fully support the deliberations of Sri Lanka with the IMF especially on the special request made to expedite an Extended Fund Facility.

Meanwhile, the Chinese authorities have granted permission to Sri Lanka use of its USD 1.5 billion equivalent swap facility for the import of essential industrial raw materials, including Sri Lankan apparel inputs. In addition, the Chinese Government recently provided Sri Lanka with a USD 1 billion refinancing facility to repay a commercial loan obtained from a Chinese financial institution.

Apart from Indian and Chinese efforts, the Government is also in talks to activate a fundraising strategy focused on Japan. The strategy is based on the trust that Sri Lanka has derived and garnered on its engagement with the IMF.

While Sri Lanka continues to expand the short-term bridging finance options, much will depend on continued peaceful demonstrations that have now gripped the country. Death in Rambukkana places this strategy in jeopardy and all offers can come to a dead halt if more violence is to erupt. All these efforts, it must be noted, are predicated on longer term financing now under negotiation with the IMF that demands social cohesion and peace on the ground.

By Ishara Gamage