Forex Crisis: Sri Lanka to Obtain US$ 300M Term Loan from Bank of China
By Ishara Gamage
A senior government official told Ceylon FT that the Government has decided to seek immediate Chinese and Indian assistance to both strengthen its rapidly-collapsing foreign reserves and avoid possible loan default.
At present, the Government must settle nearly US$ 790 million in unpaid import T-Bills for gas, petroleum and other essential imports. The spokesman said the Central Bank of Sri Lanka (CBSL) currently has to its credit only some US$ 1.2 billion in foreign reserves to settle these pending bills and honour the maturing US $ 500 million sovereign bond that becomes due in Mid-January 2022.
To manage the pressing circumstances, Sri Lanka is scheduled to borrow from Bank of China an amount denominated in Yuan equaling US$ 300 million. The bank, which is operating a local branch in Colombo since 2018 has agreed to disburse the loan via the local branch, the spokesman said.
In September 2021, Sri Lanka via the Ministry of Finance (MoF) launched a Request For Proposals (RFP) for foreign currency term loans. In response the MoF received five applications from international providers.
Speaking to Ceylon FT recently, Secretary to the Ministry of Finance, S. R. Attygalle said two out of the five applications received from them were rejected as they could not agree to the minimum conditions stipulated in the RFP. Accordingly, the remaining three applications are under further evaluation and will reach final conclusions very soon, he said.
It should be noted that the US$ 300 million Yuan denominated-term loan to be obtained through the Bank of China forms a part of the foreign currency RFP announced in September 2021.
In addition, CBSL has decided to drawdown the previously agreed CNY 10 billion (approximately US$ 1.5 billion) swap facility with People’s Bank of China (PBoC) subject to investing in Chinese Bonds.
In March 2021, CBSL and PBoC entered into a bilateral currency swap agreement with a view to promoting bilateral trade and direct investment for the economic development of the two countries. Under the Agreement, swap proceeds can also be used for other purposes as agreed upon by both parties. The agreement is valid until March 2024.
"Several months have passed since the two countries reached an agreement on this swap facility, but so far the CBSL has not taken steps to convert the money into reserve money. This is because the money could only be used primarily for transactions with China. However, according to the new agreement, CBSL has decided to officially add the relevant swap facility to the country's reserves. But the money should be invested in Chinese bonds,”the Government spokesman said.
The People’s Republic of China remains Sri Lanka’s largest source of imports. In 2020, imports from China totalled US$ 3.6 billion amounting to 22.3% of aggregate imports by Sri Lanka.
Basil’s Indian Visit Begins Today, Seeking US$ 1 B Swap
Sri Lankan Finance Minister Basil Rajapaksa is scheduled to pay an urgent official visit to India today (30), the Government sources said.
During the visit, the two countries are expected to sign final agreements on a US$ 500 million loan from India for petroleum imports.
In addition, talks are underway to secure a swap facility of at least US$ one billion from the Reserve Bank of India (RBI). We understand that this swap will be a revolving facility available for drawdown for short periods of three months.
Referring to this US$ one billion swap arrangement, some commentators say for the RBI to extend the facility, the Sri Lanka Government may have to comply with an RBI condition requiring Sri Lanka reach a balance of payments agreement with the International Monetary Fund (IMF). Given the negative position taken by the Sri Lankan Government on IMF assistance so far, such a condition precedent to activating the swap is likely to derail the entire RBI agreement.
During the visit, Minister Basil Rajapaksa is scheduled to hold discussions with Prime Minister Narendra Modi of India, his Minister of Finance and other senior government officials on expanding investment and trade opportunities between the two nations. Such discussions may, however, not proceed as envisaged.
Critics point not only to the RBI requirement but also to the recent dispute with India in relation to the East Container Terminal at the Colombo Port. It is speculated that the resulting loss of trust between the two nations may hamper the expected outcome of the Basil Rajapaksa visit to India.