Sri Lanka settles sovereign bond payment as reserves dwindle

The island nation is in its worst crisis in decades, with people facing shortages of essentials like milk powder, cooking gas and kerosene

Sri Lanka has paid $500 million due on sovereign bonds from its badly depleted foreign reserves despite calls by experts to defer the payment and use the sum to import essential foods and medicine.

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The Indian ocean island nation is in its worst crisis in decades, with people facing shortages of essentials like milk powder, cooking gas and kerosene. Television reports show people in long lines waiting to buy propane, sometimes with fights breaking out.

Including the latest payment, Sri Lanka has foreign debt obligations exceeding $7 billion in 2022, including repayment of another bond worth $1 billion in July.

The Central Bank said on Thursday that gross official reserves stood at $3.1 billion at the end of 2021. That includes a currency swap in Chinese currency worth $1.5 billion, but economists disagree over whether those funds should be included in Sri Lanka’s foreign reserves.

Negotiating deferred payments on international bonds might buy some breathing room though it may not do much to improve Sri Lanka’s credit rating or borrowing power, experts say.

The pandemic has dealt a heavy blow to an economy that depends heavily on tourism and trade, with the government estimating a loss of $14 billion over the last two years. The economy is estimated to have contracted by 1.5% in July-September 2021, the central bank says.

Shortages of cash have hindered imports of essentials and raw materials for manufacturing, and shortages have worsened inflation, which surged to 12.1% in December from 9.9% in November.

Responding to suggestions the bond payment be pushed back, Central Bank Gov. Ajith Nivad Cabral said that would only aggravate problems.

The government is gradually building back reserves and collecting necessary funds to ensure Sri Lanka can honour its debts, he said.

Sri Lanka has borrowed heavily and faces repayments on $15 billion in international sovereign bonds, Cabral said.

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