Sri Lanka raises more dollars from rupee bonds, shoring up official reserves

March, 21 (LBO) – Sri Lanka has raised 40 million dollars this week by selling rupee bonds to foreign buyers bringing the total so far 140 million dollars, an official said.

On Tuesday the rupee hit a low of 109.92 against the dollar. On Wednesday morning trade the rupee was trading around 109.85 to the dollar.

The government’s debt office has so far sold 14.6 bullion rupees worth of bonds to foreign buyers.

Dealers say foreign investors are buying into 5-year bonds at yields of around 14 percent.

Last week the Public Debt Department said 10.7 billion rupees worth of bonds had been sold to foreign clients of Citbank, Deutsche Bank and HSBC in addition to a 215 million dollar issue of foreign exchange denominated bonds.

“Consequently, the Balance of Payments (BOP) is expected to record a surplus of around US dollars 200 million, reaching original annual targets of the gross official reserves within the first quarter,” the Central Bank said.

Gross official reserves were 2,524 million dollars, in January 2007 almost the same as the December 2006 number of 2,525 million dollars.

Sri Lanka lost 2.3 percent of official reserves and six percent of total reserves in 2006, with severe pressure on the balance of payments in the second and third quarters of the year from excessive money printing.

The International Monetary Fund called for measures to boost reserves, which had fallen below three months of imports.

With the central bank calling a halt to money printing from December, analysts say the kind of pressure seen in the second half of 2006 and 2004 is unlikely to emerge.

However analysts warn that the Sri Lanka rupee is highly overvalued because three years of high domestic inflation brought about by money printing has not been adequately adjusted with depreciation.

According to the real effective exchange rate index calculated by the Central Bank, the Sri Lanka rupee was overvalued by 13.7 percent in January.

Despite the depreciation in the latter part of 2006, the technical overvaluation had got steadily worse.

In 2006 Sri Lanka’s exports fell to single digits.

Preliminary data from the Joint Apparel Association Forum says garments exports to the United States faced a setback by falling 0.4 percent to 1651.1 million dollars in 2006 from 1657.2 million though exports to the Euro zone continued to grow.

Analysts say the US picture could be an indication of the potential exports Sri Lanka is losing due to the overvaluation which started in 2005 with tsunami aid flows.

Meanwhile, confectionary exporters last week complained that factories are closing down due to cheap imports.

Rising domestic inflation, which causes the overvaluation of the currency push up production costs of both exporters and domestic producers.

For most of 2006, the rupee was propped up with official flows.

But so far this year the central bank has not allowed official flows to artificially push the rupee up and worsen the imbalance.