Sri Lanka FX Reserves Dip in January Amid Sovereign Bond Payment

(Bloomberg) -- Sri Lanka’s central bank said its foreign exchange reserves fell 25% last month after the island nation repaid a $500 million bond on Jan. 18 that helped ease worries of an immediate debt default.

Foreign-exchange reserves fell to $2.36 billion in January, the bank said on its website, from $3.1 billion a month earlier after drawing down a $1.5 billion swap line with China to bolster the pile.

Sri Lanka has been scouring for funds to prop up its reserves and repay debt amid ballooning import bills. The country’s finances have nosedived since the pandemic, with its key foreign exchange earners of tourism and remittances hit. The nation’s leaders have sought to balance ties between the major powers to get funds, while resisting a bailout from the International Monetary Fund.

India in January extended a $400 million swap line to Sri Lanka and deferred an Asian Clearing Union settlement of $500 million. Sri Lanka’s larger neighbor also last month offered a new line of credit of $500 million for the purchase of petroleum products.

President Gotabaya Rajapaksa on Jan. 9 requested visiting Chinese foreign minister Wang Yi for Beijing to consider restructuring the South Asian island nation’s debt repayments.

Sri Lanka is also roping in lenders to finance fuel imports as the island nation looks for ways to ease an electricity generation crisis and cushion the strain on finances at a time when Colombo has to pay for essentials such as milk powder, sugar and wheat.

The monetary authority has been providing dollars for current transactions, including to clear containers stuck at the Colombo port and for fuel imports. Reserves have also tended to be used for settlement of Asian Clearing Union balances, dollars given to settle government debt, unwinding of domestic swaps and valuation changes of non-US dollar foreign assets.

Delays in securing fresh funds -- key to meeting loan obligations -- have been cited by Fitch Ratings and Moody’s Investors Service as reasons for cutting Sri Lanka’s credit score deeper into junk and raising the specter of default. Sri Lanka’s dollar-denominated debt load this year is over $6 billion, including a sovereign bond of $1 billion due in July.

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