SL Missions in talks to raise USD 3B

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Diplomatic missions of Sri Lanka are in talks to raise some US$ 3 billion from the respective countries over the next few months, Government sources said.

“Sri Lanka needs a few more bridge financing options to close the funding gap until a programme with the International Monetary Fund (IMF) takes effect,” they said.

According to the Central Bank of Sri Lanka (CBSL), it will take at least 3 to 6 months to finalise an IMF arrangement subject to local political conditions.

Sri Lanka is, therefore, considering another US$ 1 billion swap facility with the Reserve Bank of India.

In addition, talks are underway to obtain an additional US$ 500 million in short-term loan assistance from India for petroleum imports.

Of the US$ 1 billion loan previously approved by India, Sri Lanka has so far drawn some US$ 300 million for the import of consumer goods. The rest will be used for other essential imports, including petroleum.

In this connection, India has to complete several time-consuming regulatory processes for their petroleum products to reach Sri Lanka.

In addition, the Government is looking at the possibility of unconditionally converting the Yuan-denominated US$ 1.5 billion swap facility currently available with China into a medium-term soft loan.

In another concession, China has recently agreed to refinance its maturing US$ 1 billion loan, although tenor and rates are unknown. Sri Lanka, however, has so far declined the refinancing facility, as it has decided to restructure all of its foreign debt, including bilateral arrangements on the principle that all external debtors are treated equally.

Sri Lanka has also applied for US$ 100 million in emergency funding through the Chinese-led Beijing-based Asian Infrastructure Investment Bank (AIIB), where Sri Lanka is also a participant. The Chinese Embassy in Colombo, however, says such financing could take at least six months to finalise. Thus, the Government is focusing on the possibility of obtaining this urgent funding requirement from the World Bank.

Meanwhile, the two large local state commercial banks, People’s Bank and Bank of Ceylon, are said to be currently facing a severe dollar and rupee liquidity crisis.

So far, People’s Bank has defaulted on the settlement of several US$/ LKR swap transactions it initiated in the face of the ongoing dollar crisis. Such default has stressed the local market, with local counterparty banks having to amend the original maturity dates of the swaps.

Given the deteriorating situation, the issuance of foreign currency loans to local banks from external sources has come to a complete standstill.

Such stress has been relieved to some extent by India and Bangladesh, who have agreed to postpone the settlement of all their swap transactions with Sri Lanka for about a year.

In addition, the Indian-backed Asian Clearing Union (ACU) has also extended all quarterly settlements by Sri Lanka during 2022 until next year.

Such financial stress cannot be alleviated altogether. As indicated by the CBSL Governor recently, the foreign reserves of Sri Lanka that can be used are at a negligible level at present.

Market participants say CBSL is currently meeting the short-term foreign exchange payments requirements of the country from funds received via the ACU System and the local foreign exchange market on a daily basis.

Inflows from exports and remittances currently amount to US$ 1.3-US$ 1.4 billion a month, of which some US$ 500-600 million is utilised to cover the import needs of exporters such as raw material, etc.

In addition, the Government has committed to spend around US$ 400 million a month on petroleum imports, with another US$ 400 million attributed to LP Gas and medication.

Thus, ignoring coupon and capital payments on foreign debt which seem to have been omitted from recent public discourse, the monthly deficit is running at around US$ 200 million a month, the primary reason for the stress. The timing of these flows is not entirely controllable, thus generating the secondary stress. With no reserves to cushion, even out, and spread these fluctuating flows, Sri Lanka remains subject to the resulting sway and hence continuous stress.

At present, the Government is taking steps to import essential medicines and LP Gas using US$ 400 million agreed to by the World Bank as well as similar financing from India for petroleum and other essentials, but neither are sustainable solutions. Containment measures are required.