Chinese $ 500 million loan received but rupee dips further

Sri Lanka yesterday took receipt of the $ 500 million worth loan from the China Development Bank but the rupee’s slide persisted to a new record-low. 

The US Dollar selling rate was quoted at Rs. 204.628 per dollar against the previous high of Rs. 203.73 at Monday’s trade.

Wealth Trust Securities said yesterday the Rupee was seen appreciating as its USD/LKR spot contract closed the day at Rs. 199.75/200.00 against its previous day’s closing level of Rs. 202.50/203.50 on one-week contracts.

On Monday, Sri Lanka's Ambassador Dr. Palitha Kohona signed the loan agreement with CDB.

Kohona said the loan will infuse vitally required foreign exchange into Sri Lankan economy and funds will help the Government's efforts to facilitate rapid economic recovery amidst COVID-19 pandemic.

He also said that timely assistance from China will help Sri Lanka's recovery and stimulate growth apart from boosting investor confidence and strengthening the currency.

The $ 500 million loan was part of $ 1 billion support from China with $ 500 million released last year.

Sri Lanka's bonds jump on $ 500 million China loan boost

Post-announcement, Reuters reported on Monday that Sri Lanka's Government bonds jumped to their highest level since September.

Sri Lankan bonds due to mature on July 22 climbed two cents to above 82 cents on the dollar having been as low as 65 cents early last month on worries that the island's deteriorating finances could lead to a default.

“The $ 500 million loan which will be disbursed this week, should provide a further boost to Sri Lanka’s FX reserves, which the central bank recently estimated at $ 4.1bn in end March, excluding the $ 1.5bn PBOC FX swap line,” analysts at J.P. Morgan said in a research note.

China approved a 10 billion yuan ($ 1.5 billion) currency swap with Sri Lanka last month.

Sri Lanka's Government bonds are now some of the best performers in the world this year. They have an average total return of 16.1% year-to-date versus -3.6% for the widely followed EMBI-Global Diversified emerging market index.

J.P. Morgan added that the bonds were likely to find further near-term support given benign backdrop for EM sovereigns, “although we think investors should 'sell into the strength'”. 

Dwindling foreign reserves, a tumbling currency and rising debt levels have dogged Sri Lanka over the last year, leading to increasing fears of a default.