Sri Lanka’s Mahendran Seeks Overseas Loans to Reduce Debt Costs

Sri Lankan central bank Governor Arjuna Mahendran is seeking concessional overseas loans to refinance costlier debt and reduce reliance on global bond markets.

“We are looking at tens of billions of dollars” from lenders including the U.S., Japan and the European Union, Mahendran said in a telephone interview from Colombo. Concessional credit will “eventually refinance most of the commercial lending the country has contracted in the last five to seven years.”

Under former President Mahinda Rajapaksa Sri Lanka raised $5.5 billion from sovereign bonds with coupons averaging 6.5 percent as it built roads, ports and power plants following the end of a civil war in 2009. Maithripala Sirisena ousted Rajapaksa in January’s presidential polls by pledging a more balanced foreign policy, and is tapping countries including India to reduce reliance on China to fund development.

“Moving away from commercial borrowing makes every sense,” said Dushni Weerakoon, head of macroeconomic policy at the Institute of Policy Studies in Sri Lanka. Debt management will get a fillip if the nation succeeds in tapping bilateral trading partners for scarce concessional funding, she said.

The South Asian island nation’s outstanding foreign debt increased by 5.2 percent to 3.1 trillion rupees ($23 billion) in 2014, according to the central bank’s latest annual report, of which 52.1 percent was on non-concessional terms.

Debt Servicing

“We are looking at hundreds of basis points of savings, which will be announced over the course of the coming year,” said Mahendran, who was appointed by President Sirisena. “Our debt-service profile on external debt will become much more benign within a year.”

Sri Lanka’s new government this year opted to sell $650 million of sovereign bonds, less than $1.5 billion last year under Rajapaksa, as a “conscious decision” to restrict commercial borrowing and in anticipation of inflows from concessional finance “over the coming months and years,” Mahendran said

The central banks of Sri Lanka and India agreed to a $1.5 billion currency swap during Prime Minister Narendra Modi’s visit to the island in March, mirroring a deal Rajapaksa reached with Chinese President Xi Jinping last year.

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