Sri Lanka to use reserves to repay $1 billion loan

Ministry of finance in Sri Lanka

Sri Lanka has arranged $1 billion to repay a five-year sovereign bond maturing next week partly from its declining reserves, sources from both the central bank and finance ministry said on Friday.

Originally the island nation’s three state banks were to borrow up to $1 billion from foreign sources before the end of 2018 to pay off the loan.

“We could not raise the whole $1 billion through state banks. So the reserves also will be used to fill the gap,” a government official who is aware of the repayment details told Reuters, asking not to be identified.

He declined to comment on how much of the reserves would be used for the repayment.

The country has to repay the $1 billion eurobond borrowed in 2014, which matures on Monday.

The government is struggling to repay its foreign loans, with a record $5.9 billion due this year and $2.6 billion in the first three months alone, amid concerns over declining reserves.

The annual GDP is $87 billion. Foreign reserves stood at just $6.9 billion at the end of 2018, down from $7.9 billion in October before a political crisis that caused all three major ratings agencies to downgrade the country’s debt.

Higher borrowing costs since the crisis have prevented the government from going to international capital markets.

A central bank official said the government had a ‘plan B’ to repay the loan with $650 million the country received from China for long term leasing of Hambantota port and the rest from reserves.

A finance ministry official also confirmed that reserves will be used to settle part of the bond.

Investor confidence took a hit when President Maithripala Sirisena abruptly sacked Prime Minister Ranil Wickremesinghe in October and replaced him with pro-China former President Mahinda Rajapaksa.

The country’s top court ruled the ouster was illegal and Wickremesinghe was restored to power in December – but the seven-week-long crisis hurt the rupee and drove sovereign bond yields higher, straining government finances.

A junior economic reforms minister on Thursday said the government has already started negotiations to raise $500 million via Panda bonds and up to $1 billion through Samurai bonds in addition to $1 billion via sovereign bonds.