SL faces currency risk on debt servicing: IMF
by Azhar Razak-December 10, 2016, 6:09 pm
Sri Lanka is facing vulnerabilities linked to inadequate reserve coverage, exchange rate depreciation, and deleveraging which could pose a risk for debt servicing, the International Monetary Fund (IMF) has warned.
Presenting the Debt Sustainability Analysis in an IMF Staff Report released yesterday, the global lender has cautioned that Sri Lanka’s currency risk, notably related to the dollar, is at present high.
"Large rupee depreciation could pose a significant risk, if sustained; as stress tests show that a 30 percent real depreciation would raise the external debt to GDP ratio to about 72 percent. In the short run, tighter global liquidity and shifts in investor confidence could raise rollover vulnerabilities and costs," the IMF pointed out.
It noted that although rollover risks are generally low due to the high share of medium-to-long-term debt, there are lumpy repayments starting in 2019 and external financing at non-concessional terms gradually substitutes concessional financing which points to a need to build up buffers. Lower than expected GDP or export growth would also deteriorate debt dynamics, the report cautioned.
According to recent statistics, Sri Lanka’s foreign exchange reserves fell by US$ 404 million to US$ 5.65 billion in November 2016 from US$ 6.053 billion a month earlier. According to the Weekly Economic Indicators released on 9th December, gold reserves at the end of November 2016 plunged by a sharp 8% to US$ 848 million compared to the figure at end October 2016.
On the other hand, the Sri Lanka rupee has depreciated by 3.1% against the US dollar during the year up to December 9, 2016, official data showed.
Over the medium term, the IMF report however stated that the ratio of external debt to GDP is projected to gradually decline. Under the program scenario, external debt is projected to decrease by 6 percentage points of GDP to 49 percent in 2021. The decline is driven by robust GDP growth, gradual current account adjustments, and subdued FDI loans and other debt-creating private capital inflows.
SL faces currency risk
on debt servicing: IMF
