Sri Lanka sees balance of payments under pressure amid foreign outflows

Friday, 17 February 2017 00:00 - - {{hitsCtrl.values.hits}}

(Reuters) - Sri Lanka could face balance-of-payments pressure due to foreign outflows from government securities, a government document showed on Thursday, even as the island nation is in the process of raising up to $2.5 billion from foreign borrowing.

The central bank is aiming to tap the international market for up to $1 billion through a syndicated loan and up to $1.5 billion via a sovereign bond.

A document submitted by the Finance Ministry this week for the approval of the sovereign bond said a possible U.S. rate hike, exchange rate volatility, and rising domestic interest rates could induce foreigners to sell government securities “prematurely to minimise any capital losses”.

The total net foreign outflow from the government securities in 2016 was $324.3 million, while offshore investors have sold a net 22 billion rupees ($146 million) worth of securities in January alone, the document seen by Reuters showed.

“If this continues ... expected level of foreign investment in T-bills and T-bonds would not be materialised,” it said.

“As a result, foreign investment in T-bonds and T-bills ... is expected to be further withdrawn by foreign investors in 2017, creating pressure on the balance of payments by a net foreign currency outflow.”

Finance Minister Ravi Karunanayake on Thursday said the foreign outflow was mainly due to sell off by a single U.S.-based foreign fund.

The Finance Ministry has said the economy has recovered after facing BOP and debt crisis in 2015 with $1.5 billion loan from the International Monetary Fund (IMF) approved last year.

The global lender has urged Sri Lanka to shore up reserves, reduce budget deficit, raise state revenue, and revive loss-making state-owned enterprises.

Sri Lanka’s rupee currency is under pressure due to foreign outflows and importer dollar demand. It has weakened 0.8% so far this year after falling 3.9% last year, following a 10% drop in 2015.

The island nation’s expected outflows in the next 12 months are $4.7 billion, official data show.

Central Bank Governor Indrajit Coomaraswamy last week said the loans and divestment from some non-strategic state-owned assets and expected inflows from leasing a stake in a shipping port could boost foreign exchange reserves to $7.5 billion by the end of this year from $6 billion at the end of 2016.