IFC shares insights to new $ 400 m cross-currency swap and prospects for SL

This facility will strengthen our efforts in helping increase US dollars and support the private sector with critical financing. The end goal would be to help contribute to the country’s urgent need to stabilise the economy. It is expected to have a development impact by way of averting any possible shortages in these items. But this is not just about supporting businesses and helping facilitate the imports of essential goods. It’s also about the signal this sends to the market. We want to send a strong message to the investor community, and hopefully it will spur more capital inflows – all of which would be critical for resilient economic recovery

The International Finance Corporation recently extended much needed support to Sri Lanka with a $ 400 million cross-currency swap facility for three leading commercial banks. It will support the private sector with critical financing, contributing to the country’s urgent need to stabilise the economy. In this interview with the Daily FT, IFC Country Manager for Sri Lanka and the Maldives Alejandro Alvarez de la Campa explains the rationale for such support, the expectations as well as IFC’s ethos in supporting Sri Lanka with an investment portfolio of over $ 2 billion of which nearly $ 1 billion has been since the COVID pandemic. Following are excerpts:

Q: Given Sri Lanka’s default status, what were the key drivers for IFC to come up with important support?

In times of crisis, there can be opportunity – particularly opportunities to help people and their country. With Sri Lanka going through its worst economic crisis in decades, there was no doubt that the country was facing a forex crisis. Corporates and local financial institutions – both state-owned and private – were facing difficulties in accessing much-needed forex, which heavily impacted the ability to make payments for essential imports like food and medicines – these are basically traded in US dollars. 

It was in such a context that IFC came in with the cross-currency swap facility. In simple terms, a cross-currency swap is an agreement to trade currencies where cash flows in one currency is exchanged for cash flows in another currency at defined rates. We knew that through this facility, we could help infuse the Sri Lankan market with US dollars. We worked with three banks – Commercial Bank of Ceylon (CBC), Nations Trust Bank (NTB), and Sampath Bank – with whom we have long-term relationships – and who also coordinate over 30% of Sri Lanka’s remittances and exports. So, we structured this cross-currency swap facility with appropriate risk mitigants in place, to extend the necessary US dollar liquidity as and when required throughout a 12-month period.

Q: What is the value of trade finance support extended so far under IFC’s Global Trade Finance Program?

IFC’s Global Trade Finance Program (GTFP) supports the extension of trade finance to underserved clients across the world. Basically, it provides risk mitigation in new or challenging markets where trade lines may be constrained. In Sri Lanka, we have extended trade finance lines to three of our partner banks, including CBC and Sampath. Now, we are looking into extending a new trade finance line to another partner bank in the near future. While the volume supported through these lines would be around $ 10 million and focused on essential imports, IFC expects to slowly ramp up the volume based on the progress made in terms of the country’s economic stability.

We believe that Sri Lanka must nurture new and emerging growth sectors. We’re working to help open up new markets, especially in export-oriented, foreign currency earning sectors

Q: Is this cross-currency swap facility by IFC largest in terms of value in a single transaction?

No, this isn’t. But I must say this stands as an example of our willingness and readiness to support Sri Lanka through difficult times. Last year, IFC provided a loan of up to $ 150 million to Dialog to help expand and improve its network capacity through the upgrading of existing sites and the construction of new 4G sites. With this support, Dialog aims to increase its fibre optic network footprint and implement upgrades to increase both capacities and efficiencies in core network operations. In June 2020 – right in the middle of the COVID-19 pandemic – we did our largest investment in Sri Lanka so far. Our investment of $ 175 million in John Keells Holding (JKH) was aimed at expanding its supermarket chain in Sri Lanka and also in helping fund expansion or refurbishment of hotel properties in both Sri Lanka and the Maldives. That’s just the investment side of the work.

We also have a very active, robust advisory program too. We have IFC’s largest, standalone country-based gender program – the Women in Work program in partnership with the Government of Australia – which is designed to close gender gaps in the private sector while improving business performance. Through this, we are working with the country’s private sector with the aim of increasing women’s employment, access to financial services, access to markets and leadership opportunities.

Since the onset of the pandemic, we have invested over $ 930 million to help Sri Lankan businesses and sustain jobs. We’ve been with Sri Lanka during good and bad times, and we know that the country needs our support.

Q: How were the three banks selected? And what amounts to each bank?

 CBC, NTB and Sampath Bank have been IFC’s trusted and longstanding partners over the years – both CBC and NTB have been with us for over two decades. And these banks have been cautiously managing their risks in a challenging operating environment. A swap line amounting to a total notional amount of $ 200 million has been extended to CBC, followed by $ 120 million to Sampath Bank, and $ 80 million to NTB. 

Q:  Given Sri Lanka’s monthly external trade is around $ 2.5 billion, of which imports are $ 1 billion, how helpful is IFC’s latest initiative?

 The purpose of the cross-currency swap facility is mainly centred on ensuring essential imports in the country. This facility will strengthen our efforts in helping increase US dollars and support the private sector with critical financing. The end goal would be to help contribute to the country’s urgent need to stabilise the economy. It is expected to have a development impact by way of averting any possible shortages in these items.

But this is not just about supporting businesses and helping facilitate the imports of essential goods. It’s also about the signal this sends to the market. We want to send a strong message to the investor community, and hopefully it will spur more capital inflows – all of which would be critical for resilient economic recovery.

IFC is well positioned to provide integrated solutions working through the Government and the private sector. Since the onset of the pandemic, we have invested over $ 930 million to help Sri Lankan businesses and sustain jobs. We’ve been with Sri Lanka during good and bad times, and we know that the country needs our support. We have invested over $ 2 billion across sectors including infrastructure, telecom, tourism, energy, health, and have also provided cutting-edge solutions and expertise to our diverse clients across the country

Q: What are the essential import items that will be financed under this facility?

This facility would help in ensuring imports of essentials like food, medicine, and even fertilisers.

Q:  How does IFC view some of the recent measures taken by the Government and the CBSL to stabilise the economy and improve external reserves?

 We know that for Sri Lanka, it is imperative that macroeconomic sustainability is restored. The Government has taken measures to reduce the fiscal deficit in 2022, with a focus on revenue mobilisation, and several other income tax measures. Without access to international financial markets, the fiscal deficit was mostly financed by domestic resources, mainly CBSL. In response to strong inflationary pressure, CBSL tightened monetary policy by increasing policy rates and the statutory reserve ratio. Several policy initiatives were also announced including trade and investment reforms, reforms of state-owned enterprises, and some important legal frameworks such as a public financial management law.

Q: What other support measures is IFC currently working on to help Sri Lanka and its private sector?

 I think IFC is well positioned to provide integrated solutions working through the Government and the private sector. With over five decades of operations in Sri Lanka, we have played a significant role in the country’s growth story. We have invested over $ 2 billion across sectors including infrastructure, telecom, tourism, energy, health, and have also provided cutting-edge solutions and expertise to our diverse clients across the country.

We believe that Sri Lanka must nurture new and emerging growth sectors. We’re working to help open up new markets, especially in export-oriented, foreign currency earning sectors such as agribusiness and tourism.  Our focus for the next few years is centred on supporting innovation for growth, strengthening critical infrastructure sectors such as transport and logistics, renewable energy to propel growth, and deepening social and financial inclusion. Advancing gender equality is also one of IFC’s priority areas in Sri Lanka. All in all, we want to deliver tangible development results for Sri Lanka’s people, helping the country on its path to drive growth, which is inclusive, prosperous, and above all, resilient.