Sri Lanka should use syndicated loans from local banks instead of central bank dollar swaps to settle upcoming sovereign bonds, experts recommend.
Sri Lanka urged to raise syndicated loans from local banks to repay sovereign bonds
Sri Lanka should use syndicated loans as a more stable financing option rather than relying on central bank dollar swaps, according to economic analysts. The proposal suggests that the government should structure dollar syndicated loans targeting local banks, tapping into their foreign currency deposits, to settle maturing sovereign bonds and reduce exposure to risky circular debt operations.
Currently, Sri Lankan banks participate in syndicated loans abroad, using their non-resident and foreign currency deposits. Analysts argue that part of these funds could be directed toward financing the government’s external obligations, provided the loans are properly structured. Syndicated loans, unlike illiquid international sovereign bonds, offer longer repayment horizons, amortizing features, and flexibility to include clauses that allow repayment through rupee securities if necessary.
In contrast, central bank buy-sell swaps used to provide dollars for debt repayment transfer foreign exchange risk directly onto the monetary authority, exposing the public to additional risks. Analysts warn that such practices fuel inflationary pressures, erode reserves, and threaten monetary stability. Instead, responsibility for forex risk should remain with the Treasury, which can also raise rupee securities domestically and use them to purchase dollars from the market.
Sri Lanka’s past experience with illiquid international sovereign bonds highlights the dangers of losing market access during times of global shocks. Thinly traded bonds have made the country more vulnerable, with investors quick to exit at the first sign of instability. In contrast, syndicated loans negotiated with lead managers and co-lead managers provide a structured, negotiated process with longer-term stability.
The country’s high savings rate presents opportunities to raise funds through local banks while ensuring that foreign reserves remain secure. Analysts point to the experience of East Asian economies, where deflationary monetary policy and prudent financial management allowed them to build reserves and maintain confidence.
While syndicated loans also carry risks if domestic monetary policies are unstable, they provide more time to accumulate dollars for repayment compared to bullet-repayment bonds. Countries like Ecuador have demonstrated that the true cost of sovereign defaults lies not in higher coupon rates but in the loss of market access. For Sri Lanka, avoiding reliance on volatile bonds and inflationary swaps will be critical to maintaining financial stability under the ongoing IMF program.
Ultimately, the recommendation is clear: Sri Lanka should prioritize syndicated loans from local banks, structure them with amortizing features, and avoid central bank dollar swaps. Such measures will reduce risks, support monetary stability, and provide breathing space as the nation works through its debt restructuring process.