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Sri Lanka will insulate some investors from exchange rate fluctuations as the island nation seeks to boost inflows into local-currency bonds and other sectors.
The government approved one to two-year USD/LKR swap facilities with provision to carry out the initial and subsequent forex transactions at the same exchange rate, according to a statement Tuesday after meeting of the cabinet ministers. The risk cover is subject to inflows being in a range of $25 million to $1 billion.
“The Central Bank of Sri Lanka has identified the need to facilitate non-resident investors to enable to invest in government securities and other sectors to encourage the inflow of foreign currency into the country,” according to the statement.
Sri Lanka was planning incentives to attract overseas investors into local bonds in a bid to reduce the nation’s reliance on foreign debt, Ajith Nivard Cabraal, state minister of finance, capital markets and public enterprise reform, told Bloomberg in an interview on September 9. Foreigners have exited Sri Lankan assets in recent years amid a clouded economic outlook following political upheaval in 2018 and the Easter Sunday terror attacks last year.
“This decision will definitely be taken positively and be a catalyst for strengthening the rupee,” said Dimantha Mathew, head of research at First Capital in Colombo. “Rupee bonds should see positive inflows.”
The rupee, which was trading at 181.18 to a dollar on January 1, plunged 8 per cent to a record low in April before recovering. The currency was up 0.2 per cent at 185.05 on Wednesday after the announcement.
The nation could attract about $3.5 billion to the local debt market over the next year, which “would make a huge difference to Sri Lanka’s external account,” Cabraal said in the interview earlier this month.
Foreign investment in Sri Lanka’s rupee debt fell to around 12 billion rupees ($60 million) from some 450 billion rupees in 2014, even as local-currency bonds have seen some reversal of outflows in the past two weeks.
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