• Argues Govt. must make clear its repurchase plans before P’ment as it is responsible for public finance 
• Warns possibility of default high due to COVID-19 impact on forex earnings

The United National Party (UNP) yesterday criticised potential efforts by the Government to avail itself to a Repo facility extended by the US Federal Reserve as illegal, arguing Sri Lanka’s monetary law does not specifically make provisions for such an arrangement and called for an explanation to Parliament on how the funds will be repaid.    

A recent statement by the Central Bank confirmed that the monetary authority has entered into an agreement with the US Federal Reserve for a possible $ 1 billion Repo arrangement as a temporary source of dollar liquidity to be used when required. The facility is an overnight repurchase (Repo) facility available for ‘Foreign and International Monetary Authorities’ (FIMA).

The UNP releasing a statement called for the Government to clarify how the Government plans to repurchase the securities that will have to be pledged to the US Federal Reserve in order to obtain the $ 1 billion.

“We ask that the Government clarify what these assets are and the price at which we have to repurchase these securities? How does a country with a shortage of $ 7 billion in export earnings repay over $ 1 billion to recover the pledged US securities? In this scenario the possibility of a default is extremely high, with the country facing the likelihood of losing ownership of the assets pledged in this agreement,” the statement issued by the Deputy General Secretary Ruwan Wijewardena said. 

The statement went on to observe that as Parliament is vested with the control of public finance it was necessary that the Government’s plans be presented to the House along with proposals on how to repay the Repo facility before a final decision is made.  

“Under our Constitution, Parliament is vested with the control of public finances, the monetary law does not make specific arrangements for this repurchase agreement. Firstly the Government must come to Parliament and make provisions for the repurchase agreement, this will also provide them with the opportunity to explain to the country the need for such an arrangement. Until then this agreement is illegal,” the statement added. 

As part of the contingency plans to meet COVID-19 related difficulties, the Central Bank of Sri Lanka (CBSL) said the Government has decided to pledge a sum of $ 1 billion worth of US Treasury Bonds held in the CBSL reserve and enter into a repo facility with the FED. 

This would permit the CBSL to raise $ 1 billion in cash form when required. When this Repo facility is settled by the CBSL, there will be no change in the CBSL reserve position as the FED would release the pledged bonds back to the CBSL. The cost to the CBSL would be the applicable repo fee, which is about 0.35% per annum. 

The CBSL has entered into this agreement with the FED, but no borrowings have yet been made. Withdrawing from the facility at any point is at the discretion of the CBSL.

Central Bank Senior Deputy Governor Dr. Nandalal Weerasinghe during a recent press conference said that the funds would only be drawn as a “last resort”. The Government currently has about $ 6.2 billion but is in the midst of preparing to repay a $ 1 billion bond in October. 

The Central Bank last week also locked down a $ 400 million SWAP facility with India and talks are continuing on the possibility to expanding it to $ 1 billion as well. The Government has repeatedly assured that it will find the funds to repay $ 4.6 billion due in debt repayments this year despite the COVID-19 impact closing off raising funds via international financial markets.   

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