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Sri Lanka: Usable reserves at US$50mn; US$1bn/month required for essentials

  • Official reserves reach USD 1.9bn; Gold holdings down 3.1% MoM

  • Excluding the USD 1.5bn China swap, usable reserves amount to less than USD 50mn

  • Government expenditure policies expected in the near term; PM announces further support to lower income category

Lakshini Fernando
Asia Securities
8 June 2022
Published by

Official reserves reach USD 1.9bn; Gold holdings down 3.1% MoM

Sri Lanka’s official reserves reached USD 1.9bn in May (+6.0% MoM, -52.4% YoY). This comes despite a USD 900mn payment extension of 1) USD 500mn payment to the Asian Clearing Unit (ACU) and 2) USD 400mn swap payment due earlier this year. We note that the reserves figure includes the USD 1.5bn China swap line, which cannot be utilised unless reserves cover 3.0 months of imports.

According to Central Bank data, USD 456mn in repayments (only foreign currency loans, securities, and deposits) were due during the month, which were likely deferred owing to the restructuring program. Official reserves continue to cover less than a month of imports. Foreign currency reserves were up 12.7% MoM (-49.1% YoY). Notably gold reserves were down 3.1% MoM to just USD 27.8mn (compared with USD 954mn in December 2019).

While our discussions indicate that the Central Bank is seeking a USD 1.5bn funding line from India, we note that a Staff level agreement is crucial for the finalisation of discussions. We note that discussions with the IMF are ongoing, and the recent tax proposals are a key positive to indicate that Government’s stance of improving the fiscal deficit to a manageable level. At this parliamentary speech yesterday, the Prime Minister stated that Sri Lanka requires USD 5.0bn in funding to supply essential imports like fuel, cooking gas and fertiliser for the next 6 months. In addition, he noted that USD 1.0bn was required to support the USD/LKR, ensuring minimum volatility.

Government expenditure policies expected in the near term; PM announces further support to lower income category

In-line with our views expressed over the past months, the PM noted that the need to ensure a strong social safety net for lower income earners is crucial at this point. As such, the Government plans to expand its Samurdhi and public sector pension support from LKR 700mn to LKR 850-900mn. However, our discussions indicate significant leakages in the Samurdhi system, leading to only about 15.0% of total funds reaching the low-income category.

While no expenditure curbing policies were announced at yesterday’s Parliamentary sessions, we expect a comprehensive interim budget to be announced in the near term. We note that this is a crucial requirement for the ongoing IMF talks.

We expect the finalisation of a Staff level agreement in the next 1-2 months. However, we factor in disbursements of funds through a program to materialise towards year end/early 2023 given that progress on the debt restructuring discussions is key to any disbursements.