Sri Lanka raises Rs. 6 bn via inflation linked bond

June 30, 2006 (LBO) – Sri Lanka’s Central Bank Friday placed a 6 billion rupee government bond linked to an inflation index, which is expected to clear a part of the government’s overdrafts with state banks.

(US$ 1 = Rs. 103) The debt, which carries tenures of three and four-years, is believed to have been privately placed with state-run People’s Bank on Friday, market source said.

Sri Lanka’s government dips into the state banks whenever it hits a cash crunch, but economist say the overdrafts push up inflation and contribute to balance of payments problems.

 


Inflation
linked bonds


3-years

4-years
Date of Settlement 30-06-2009 30-12-2010
Coupon Rate 11.05%
11.10%
Coupon payments
semi-annual

semi-annual

During the 1999/2000 balance of payments crisis, the treasury overdraft with the two state banks topped 50 billion rupees.

Before the current balance of problems started, government reliance on printed money for central bank credit rose sharply, while market sources say the overdraft with state banks reached 14 billion rupees.

The 3-year bond carries an 11.05 percent coupon rate, while the 4-year issue carries a yield 11.10 percent in the first year, Central Bank’s Public Dept Department, which raises money for the government, said.

The coupon rate is pegged at one percentage point above the country’s annual inflation rate for the remaining years, Central Bank’s Acting Superintendent of Public Debt, M Hemachandra said in a statement.

Sri Lanka’s official inflation rate rose to 17.7 percent in June over 13.2 percent in May, fueled by price hikes in fuel and food.

The island’s Central Bank has forecast year-end inflation of around 11.0 percent, up from an earlier forecast of 9.00 percent for 2006.

Inflation in the tropical island consumer has also risen by administered price rises of fuel, in addition to demand pressure.