Sri Lanka settles sovereign bond payments as reserves dwindle

Sri Lanka Pays $500 Million On Its Bad Sovereign Bonds foreign reserves dwindled Despite calls by experts to defer payment and use the amount for import of essential food items and medicines.

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Indian Ocean island nation biggest crisis of decadesPeople are facing shortage of essential items like milk powder, cooking gas and kerosene. Television reports show people in long queues, sometimes even fighting, to buy propane.

Including the latest payment, Sri Lanka has an external debt obligation of over $7 billion in 2022, including the repayment of another $1 billion worth of bonds in July.

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

Experts say negotiating deferred payments on international bonds may bring some relief, though it may not do much to improve Sri Lanka’s credit rating or borrowing power.

The pandemic has dealt a heavy blow to an economy that relies heavily on tourism and trade, with the government estimating losses of $14 billion over the past two years. The central bank says the economy is projected to shrink 1.5% in July-September 2021.

Cash crunch has hampered imports of essential and raw materials for manufacturing, and the shortfall has worsened inflation, which rose to 12.1% in December, from 9.9% in November.

Responding to suggestions the bond payments were pushed back, Central Bank Sarkar Ajit Niwad Cabral said it would only add to the problems.

He said the government was gradually building up reserves and collecting the necessary funds to ensure that Sri Lanka could pay off its debt.

Cabral said Sri Lanka has taken on huge debt and is facing repayment of $15 billion in international sovereign bonds.