Economists question decision to repay sovereign bonds amidst depleting reserves

Economists question decision to repay sovereign bonds amidst depleting reserves

Written by Staff Writer

12 Jan, 2022 | 6:44 am

COLOMBO (News 1st); Although Sri Lanka’s Joint Cabinet Spokesperson Minister Dr.Ramesh Pathirana admits that the country is currently facing a dollar crisis, the Government is of the stance that the country will settle the USD 500 Million worth of International Sovereign Bonds (ISB) due on the 18th of January 2022.

Minister Pathirana said every Sri Lankan Government in the past has made arrangements to settle the loans they have obtained and the Sri Lankan Government will take swift steps to settle this USD 500 Million in this particular instance as well.

We have clearly stated we have the required strength to do that, said Pathirana.

WHAT ARE INTERNATIONAL SOVEREIGN BONDS?

International Sovereign Bonds is a facility obtained by a Government from the Open Market for its financing needs.

The Government will issue bonds to the market, and it is the government that takes responsibility for settling these bonds.

The Government will have to pay back the money within a short period of time along with a comparatively higher interest rate.

Instead of the concessionary loan schemes obtained from financial institutions such as the International Monetary Fund or the World Bank, International Sovereign Bonds can be obtained with much ease. Sri Lanka entered the Sovereign Bond market in the year 2007.

WHAT IS THE PROCEDURE OF SETTLING ISBs?

A country must have dollars reserves to settle Sovereign Bonds.

With the facility of USD 1.5 Billion Sri Lanka received, the total reserves of the country increased to USD 3.1 Billion.

However, the entire reserves cannot be used to settle dues.

For example, when we speak of a SWAP, it means that we get the financial facility in the currency used by the lending country.

Therefore, there is no room to convert that money into USD.

It is also important to note that, a portion of the total reserves are in Gold.

Sri Lanka sold more than USD 200 Million worth of Gold last December alone.

The current value of the Gold Reserves Sri Lanka has is USD 175 Million.

According to economic experts, if the Government decides to use the remaining reserves to settle the USD 500 Million worth of Sovereign Bonds, Sri Lanka will face dire consequences fuelled by the exponential reduction of reserves.

05 Present and Former Chairmen of the Ceylon Chamber of Commerce who appeared on Face the Nation last night, emphasized that the Government’s decision to settle the Sovereign Bonds is indeed very dangerous.

They pointed out, if the International Grading Agencies decide to downgrade the credit rating of Sri Lanka furthermore, the situation would be even more dangerous.

Suresh Shah, the former Chairman of Ceylon Chamber of Commerce during 2013-15 said, When our people are standing in the gas or milk food queue, they are not making a sacrifice on behalf of the country. They are making a sacrifice on behalf of bondholders. That’s fundamentally what it is and we need to make a shift there.

Rajendra Theagarajah the former Chairman of Ceylon Chamber of Commerce during 2017-19 noted that we must reserve the foreign exchange we have built it up and create a positive rating environment because we cannot afford to lose the middle-income status.

Economic experts point out that Sri Lanka has the ability to restructure the payment of these Sovereign Bonds.

They say that the money Sri Lanka can save from that move will strengthen the reserves of the country and could be used for imports as well.

Dr. Nishan De Mel, the Executive Director of Verité Research said ” that 500 million USD if used for fuel, can buy 5 months of it. If used for pharmaceuticals can buy 1 year of it, if used for dairy products can supply 1 and a half years and for fertilizer 2 years”.

WHY IS THE GOVERNMENT SO DETERMINED TO SETTLE THESE ISBs?

According to the economic experts, foreign investors could take advantage of the market and make massive profits while engaged in businesses using ISBs.

Opposition Lawmaker Dr. Harsha De Silva elaborated further and said a Sovereign Bond that is valued at USD 100 has dropped down gradually in 2020 and is being sold at USD 50 at present. He said that it is not his own view but was according to Bloomberg.

WHAT HAS BLOOMBERG REPORTED ABOUT SRI LANKA’S ISBs?

According to Bloomberg, “A top emerging-market money manager at Vontobel Asset Management, Zurich Carlos de Sousa, expects the Sri Lankan Government to run out of money to pay creditors by mid-year.”

According to Bloomberg ”The Venezuela-born investor already owns the bonds and is waiting for a default-led selloff to buy more, betting the average recovery value of the notes could top current prices.”

According to Bloomberg, most of Sri Lanka’s external bonds have lost about half of their value since the beginning of the pandemic to trade around 50 cents on the dollar as foreign-exchange reserves dwindled.

De Sousa said “Bonds are so cheap that the recovery value is above current prices,” adding “the default probability is bigger than 50%.”

Bloomberg cited similar examples from Ecuador, Colombia, and Zambia.

Why is the Government so eager to settle the International Sovereign Bonds at a time where they have the option of restructuring them, given the dire economic state of the country?

WHAT IS THE ECONOMIC STRATEGY OF THE GOVERNMENT OF SRI LANKA?

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