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Sri Lanka taps forex reserve to whittle down debt

Sri Lanka paid back USD 1 billion of its external debt on Monday by tapping its foreign currency reserve, Central Bank of Sri Lanka Governor Dr. Indrajit Coomaraswamy said, after attempts to raise the funds from the international bond market failed.

The country had USD 6.9 billion in foreign exchange reserves at the end of 2018. Using those assets to repay the additional USD 4.9 billion in debt due by the end of 2019 would leave nothing.

In the Indian Ocean sea lanes connecting the Middle East and East Asia, Sri Lanka is strategically located for China's Belt and Road infrastructure initiative. Having stumbled in repaying debt, the government handed over the operating rights of the key southern port of Hambantota to the Chinese in late 2017. According to local financial experts, nearly 15% of Sri Lanka's total debt is owed to the Chinese.

he country's external debt increased 7% over a year to $53.1 billion by the end of 2018. Interest payments account for 38% of government revenue, the world's third-highest portion after Lebanon and Egypt, according to S&P Global.

Recent political turmoil has only exacerbated the situation. President Maithripala Sirisena unilaterally dismissed Prime Minister Ranil Wickremesinghe in October to replace him with a former president, Mahinda Rajapaksa. 

The policy paralysis that lasted until Wickremesinghe was restored to office in December saw the Sri Lanka rupee tumble and the forex reserve drop by USD 1 billion.

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