Sri Lanka braces for critical week in bid to stabilize economy

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Sri Lankan leaders will face critical tests next week over how they plan to pull the South Asian nation out of an economic slump, with a bond payment due followed by an interest rate decision. interest, as well as a presidential address that will set political priorities as the island faces soaring inflation, dwindling reserves and wary investors.

While policymakers said they have allocated resources to service $500 million in bonds maturing Jan. 18, they have yet to reveal how they plan to pay off $1 billion in debt due in July. President Gotabaya Rajapaksa is expected to address parliament on Tuesday when he possibly outlines plans to tackle the challenges facing the economy.

Two days later, the Central Bank of Sri Lanka will have the first opportunity this year to tackle Asia’s highest negative real rates, which are dampening the appeal of the nation’s already rated assets at a time when global central banks are becoming warmongers. The monetary authority will have to balance the need for imported capital against the risks to economic growth of excessive tightening.

The CBSL is likely to resist any change in policy settings now as growth still remains weak with the omicron threatening economic activity, said Saurav Anand, South Asia economist at Standard Chartered Plc. Externally, the foreign exchange reserve situation is far from comfortable, he said.

Sri Lanka’s credit rating was further reduced to nil this week by S&P Global Ratings, which raised the likelihood of further deterioration in the country’s external financial situation, affecting its ability to service its debt this year. .

The country’s currency pile stood at $3.1 billion last month after it withdrew a $1.5 billion swap facility from China, with central bank governor Ajith Nivard Cabraal seeing the possibility of increased support from Beijing to honor its debt obligations. Colombo separately secured a $400 million currency swap from India, in addition to securing a $500 million settlement deferral from the Asian Clearing Union.

Yet investors like Carlos de Sousa, who oversees a $3.8 billion bond fund for developing countries at Vontobel Asset Management SA in Zurich, expect the South Asian country to lack money to pay its creditors by the middle of the year. Sousa is now waiting for Sri Lanka to default to add to the national debt.

Dollar bonds at 7.55% maturing in 2030 were flat, while dollar debt maturing in July this year was also little changed at 70 cents on the dollar.

Despite Sri Lanka’s weak external position, the country remains deeply reluctant to seek assistance from the International Monetary Fund as this would imply austerity measures.

The nation also faces a soaring import bill amid rising world prices and as the government tries to make up for a shortage of everything from food to fuel. The government unveiled a billion-dollar relief package last week as President Rajapaksa sought to temper growing public anger over soaring prices for basic necessities such as food and medicine.

The Sri Lankan cabinet this week approved the import of 300,000 tonnes of rice from India in a bid to cool prices which have risen in part due to crop failures. Import controls and last year’s government ban on the use of chemical fertilizers and the import of agrochemicals, which was revoked amid farmer protests, have led to depleted harvests and soaring prices.

But Governor Cabraal expects inflation – driven by what he sees as supply-side shocks – to decline in the coming months. He is also betting on the Sri Lankan economy growing by 5.5% this year, despite the challenges posed by the pandemic.

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