Sri Lanka g-secs see foreign interest trickling in

June 01, 2009 (LBO) – Sri Lanka’s government securities market has seen a trickle of foreign investment as the country is slowly emerged from a balance of payments crisis, official data showed. The central bank said the volume of Treasury bonds held by foreign investors increased by about 1,500 million rupees (about 10 million US dollars) to 4,000 billion rupees over the week ending May 27.

By mid 2008, more foreign investors had put more than 600 million US odllars into the market. But they fled the country in the latter part of the year.

Though authorities said about 200 million US dollars would remain in the market, the balance also fled as Sri Lanka defended a dollar peg by printing money (sterilized intervention), which put further pressure on the rupee.

A float of the rupee was needed to break the downward spiral and end central bank liquidity injections which were putting pressure on the rupee.

The rupee was floated ahead of an International Monetary Fund bailout in late March. Though the IMF has been delayed, the float worked and the monetary system has since stabilized.

In March the central bank’s foreign reserves fell to 830 million US dollars, amid tighter data standards.

Central Bank governor Nivard Cabraal told LBO last week that the monetary authority has bought just over 100 million US dollars from forex markets over April and May.

Analysts say the major risk to the economy comes from the fiscal side. Standard & Poor’s lowered the outlook on Sri Lanka ‘B’ speculative rating to ‘negative’.

“We could see positive credit risk repricing of Sri Lanka in general, especially if structural reforms on the fiscal side are addressed as part of an IMF program agenda,” Citibank said last week in a report.

Government revenues have fall 10.6 percent in the first two months of the year.

Now that the war is over there is hope that the government will renew its efforts to reign in the budget deficit,” HSBC bank said in a report to clients.

“Much remains to be done in terms of rationalizing the tax structure, broadening the tax base, cutting subsidies and most importantly reducing the government’s high salary and interest bill.”

The IMF loan has been delayed amid a diplomatic spat with the United States and Britain over treatment of civilians in a recently concluded war with Tamil Tiger separatists.

Through the float, which was a prior action to a bailout, the delayed IMF program has already achieved its key objective of stabilizing the currency and ending reserve losses.

But any IMF funds would also bolster foreign reserves and act as a buffer for official external payments.

Heath Schuler, a visiting US congressman last week said he believed Sri Lanka needed the IMF money and would take back the message to his colleagues.

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