ISB buy-backs: Policy reversal by Central Bank – an addendum

My article titled ‘ISB buy-backs: Policy reversal by Central Bank’ published in Daily FT on 22 October has generated several comments. Three insightful comments made by prominent international experts in the field, made me to write this addendum to clarify some important points and restate my conclusions more clearly.

The main objective of my previous article was to educate the average reader and, hopefully, get them to expect/demand transparency and accountability from important public institutions like CBSL. It was not aimed at policy makers. Therefore, the article was descriptive and explanatory.

However, I agree with the commentators that my article could have contributed more if I were clearer in stating my inferences.

My inferences on bond buybacks as part of CBSL’s external debt management policy are as follows:

1. If ideal/appropriate circumstances exist, buying-back outstanding ISBs can be beneficial to a country. (For example, if excess foreign exchange reserves are available or if there are other ways of raising long-term loans at cheaper interest rates to replace ISBs.)

2. Such ideal circumstances do not exist for Sri Lanka now and very unlikely to exist in the next 3 years (within the time frame of the CBSL’s policy). Sri Lanka is not able to buy-back its outstanding ISBs now or during the next three years:

a. It does not have foreign exchange reserves to buy-back its outstanding ISBs

b. It will be impossible for Sri Lanka to raise (borrow) fresh long-term funds, at cheaper rates than it is now paying on outstanding ISBs

3. CBSL does not seem to have given due consideration to the likely adverse reputational effects of buying back its ISBs at the prevailing discounted prices when the cause of the discount is the perceived inability of CBSL to honour its commitments. In other words, CBSL cannot expect to unduly benefit from an adverse situation it has willingly, or unwilling created for its investors. 

4. Although buy-backs are permitted in the bond agreement, there is no assurance that the Trustee will cancel bought back bonds by the CBSL. If buy-backs are construed as undue, refusal by the trustee to cancel as well as class actions by the bond holders are possibilities. These possibilities should have been thoroughly studied. 

5. CBSL had taken the policy decision to buy-back ISBs without proper evaluation of (i) its ability to pay, (ii) the behaviour and the workings of the ISB market, (iii) the financial, reputational, legal repercussions.

6. CBSL had no other alternative but to cancel (reverse) its policy decision to buy-back its outstanding ISBs.