Despite some financial support: Sri Lanka FX Reserves Still Low – Moody’s
By Mario Andree
Sri Lanka’s foreign reserves are still low and covers only two months of imports despite the Government taping in to multilateral loans, Central Bank swaps, commercial bank loans, divestment of some State-owned assets, says an international rating agency. Foreign exchange reserves covered less than two months of imports at the end of August, which is a credit negative, Moody’s Investor Services said. According to the rating agency the reserves are also well below the Government’s annual external debt repayments of around US$4-US$5 billion through at least 2025. Due to the limited external financing options and the ongoing pandemic-related lockdown weighing on the recovery of non-debt generating inflows, the foreign exchange reserves data points to a rising risk of debt default, it said.
“Without sizeable external financing that is relatively secure and long term, we expect foreign exchange reserves to continue declining over the next two to three years,” the agency said. To shore up foreign exchange reserves and gain financing support, the Government and the Central Bank of Sri Lanka (CBSL) have tapped project related multilateral loans, official sector bilateral assistance in the form of Central Bank swaps, commercial bank loans, divestment of some State-owned assets and most recently, calls for a new foreign currency term financing facility.
Some amount of inflows materialised in August, while Sri Lanka also received an International Monetary Fund Special Drawing Rights allocation of around $800 million. However, according to Moody’s, such inflows are piecemeal and boost FX reserves only temporarily and marginally given the Government’s external repayment schedule. Some measures by CBSL, such as the required sale of a share of all inbound remittances and export proceeds to the Central Bank, restricting imports and outbound remittances and investment help retain some foreign exchange resources in the country, the agency said.
Although these measures may be effective in the short term, they could weigh on economic activity and deter investment inflows, the agency warned. Prospects for a swift increase in non-debt generating inflows through international tourism and foreign direct investment (FDI), including the Government divesting assets to non-residents, are further constrained by Sri Lanka’s ongoing lockdown and the slow recovery in international travel, the agency said. While the development of the Colombo Port City, new commercial agreements with the Government, and the privatisation or divestment of Government assets would yield foreign exchange inflows, pandemic-related delays in these projects are likely to weigh on the pace of these FDI inflows, the agency said.
Under the current circumstances Moody’s expects net FDI inflows into the country to average around US $1 billion in 2021-22, compared to a peak of around $2.2 billion pre-pandemic in 2018. Recovery in the tourism sector, which is another debtfree foreign exchange inflow generator, also depends on how quickly the appetite for travel overcomes cautious behaviour, the agency said. Current restrictions on public gatherings include a 10 PM-4 AM curfew and limits on operating hours or capacity for businesses such as restaurants and hotels might hinder tourism income, the agency warned. If effective, the Government’s vaccination strategy will support the reopening of the economy and borders in 2022, and has the potential to boost the tourism sector and nondebt generating inflows, the agency said.