Sri Lankan Banks Discuss Repayment of Sovereign Bonds in Rupees Amid Exchange Rate Concerns
Sri Lanka’s domestic banks are in negotiations with the government about repaying their sovereign bonds in rupees, according to sources. This potential shift has raised concerns about its impact on the exchange rate.
Currently, out of $12.55 billion in sovereign bonds, approximately $1.75 billion is held by resident investors, predominantly banks. Repaying these dollar-denominated assets in rupees could create a negative foreign exchange position for banks, which would need to be covered by purchasing dollars from the market.
The proposal aims to avoid a haircut on the International Sovereign Bonds (ISBs), similar to the situation with Sri Lanka Development Bonds (SLDBs), which were repaid in rupees without a haircut in August 2023. However, there are worries that this could affect the exchange rate and hinder reserve accumulation if applied to ISBs.
Banks have already accounted for around 50% of their sovereign bond exposure and adjusted their dollar net open positions accordingly. Alternative solutions are also being explored, including adjustments in domestic credit and rupee inflows.
Foreign investors have shown willingness to accept repayments in rupees if the same option is available to them and if it aligns with International Monetary Fund (IMF) debt analysis parameters. While repaying in rupees could lower future foreign debt service, significant foreign holdings in rupee securities could pose outflow risks.
State Minister for Finance Shehan Semasinghe confirmed ongoing discussions with local banks through advisors but declined to provide details on the negotiations.