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Sri Lanka is in the grip of an economic crisis. As foreign currency reserves dry up, it is looking to woo international investors, but will they be tempted? Kimberley Long reports. 

Sri Lanka’s economy has taken a heavy blow, thanks to the culmination of several factors. Years of overseas borrowing have left the country heavily indebted, with $35bn in external government debt, and $7bn in payments due to be repaid during 2022. However, the significant reduction of the country’s foreign currency reserves has left Sri Lanka unable to pay its debts. 

As the country grappled with the crisis, all 26 of the country’s cabinet ministers resigned on April 4, with the exception of the president, Gotabaya Rajapaksa, and his brother — the prime minister — Mahinda Rajapaksa. The central bank governor Ajith Nivard Cabraal resigned soon after, to be replaced by Dr P Nandalal Weerasinghe, who had served as senior deputy governor of the bank until January 2021. 

Speaking at a media briefing following his appointment, Mr Weerasinghe said he had the authority to continue to run the central bank independent from the government, and believed the bank could get the country out of its current problems. “Things are challenging and we need to take decisive action,” he noted. “Things will get worse before they get better, but we need to apply the brakes to this vehicle before it crashes.” 

Significant flows of foreign currency had, in the past, come from the country’s buoyant tourism sector, which accounted for around 5% of gross domestic product. But the sector, which was getting back on its feet following the 2019 Easter Sunday terrorist attack, was badly affected by the pandemic.

Ashok Pathirage, chairman and CEO of Softlogic Holdings, says: “Sri Lanka saw a $1.2bn impact on tourism due to Covid-19. The country sees $4.5bn annual income from tourism. The government moved quickly and had a good aid programme to provide support for impacted sectors. We remain hopeful there are signs tourism is coming back.” In a bid to glean some foreign currency reserves from travellers, during January 2022 the Central Bank of Sri Lanka called for all hotels to only accept payments from non-residents in foreign currencies. 

We remain hopeful there are signs tourism is coming back

Ashok Pathirage

The pandemic also hit overseas remittances, which are an important source of foreign currency. While many workers lost their jobs overseas, for others the devalued rupee meant the rates offered on the black market became more attractive. “The lower exchange rates offered through official channels led to a rise in black market remittances,” Mr Pathirage says. “This caused a shortfall of between SLRs300m ($92,000) to SLRs400m. As the value of the rupee builds up, we should see more remittances through the official channels.” 

Mr Pathirage says: “The economic situation has been exacerbated by different factors. Dollar shortages have led to fuel shortages, which have caused power cuts — these are the issues that have hit the people.” 

Softlogic Holdings’ portfolio includes healthcare, retail and financial services, all areas that are feeling this difficult climate. “The rupee disruption has had an impact on trade. Hopefully this will settle in three to six months, when we can re-evaluate the situation,” adds Mr Pathirage.

Steps have been taken to help ease the pressure. Key interest rates were doubled by the central bank — an increase of more than 700 basis points — in an attempt to slow rising inflation. The monetary board raised its standing lending facility to 14.5% and the standing deposit facility to 13.5%. 

Appealing to its people directly, the central bank called for the diaspora to contribute donations of foreign currency to bolster the reserves, with assurances that the funds will only be used for importing essential goods, including food, medicines and fuel. 

Overseas investors 

Sri Lanka is hoping to tempt overseas investors to look beyond the current issues and focus instead on the longer-term opportunities. In a bid to drum up international interest, the Sri Lanka High Commission in London hosted the Invest Sri Lanka Forum in conjunction with the Securities and Exchange Commission (SEC) of Sri Lanka and the Colombo Stock Exchange (CSE) at the end of March 2022. 

Mr Pathirage believes the declining price of stocks makes it an attractive time for overseas investors. “Foreign investors wanted to come, but held off due to the value of the rupee. Now is the right time with the rupee depreciation. Stocks are trading at 30–40% lower than before.” 

The stock market benefited from the announcement Sri Lanka would go to the International Monetary Fund (IMF) for assistance, as the All-Share index rose 1.28% in mid-March. However, in order to gain IMF assistance, the country halted all debt repayment ahead of debt restructuring, causing a default. 

Dumith Fernando, chairman of the CSE, says the country’s corporates remain strong despite the ongoing crisis: “Balance sheets are stronger; now 70% of listed companies have a debt to capital ratio of under 50%. These companies are able to weather the challenges well. 

“There are a lot of attractive aspects for foreign investors,” Mr Fernando adds. “Companies have liquidity of up to seven times the levels seen in 2019 and, of these companies, more than 30 have stocks that trade at over $100,000 a day.” 

Investment reforms 

For several years, Sri Lanka has been working to modernise its capital markets to make it a more attractive prospect. This culminated in the SEC of Sri Lanka introducing Act No. 19 in 2021, replacing a previous law that had been unchanged since the commission’s inception in 1987. 

The new law aims to modernise and future-proof investment in the country. It covers seven areas, providing new guidance for market institutions and market intermediaries, laying out good corporate governance practices, and outlining market offences and their repercussions. 

Viraj Dayaratne, chairman of the SEC of Sri Lanka, explains: “Key points in the new framework are around investor protection. The market participants, the investors, the stock exchange and the clearing house are all regulated, creating a more efficient space for the inventors and for market intermediaries to provide a better service.” 

Greater protection includes extending the scope for offences and introducing strict actions against offenders. Mr Dayaratne believes this will have the effect of both increasing investor confidence, while also acting as a deterrent. Those found to have been in breach of the law can be fined from SLRs1m to SLRs25m, and handed a jail term of between five and 10 years. “The aim was to introduce the best practices and principles to create confidence in the minds of foreign investors,” explains Mr Dayaratne. “We looked to good centres of finance, like Singapore, to act as the benchmark.” 

In a bid to modernise the market structures, the new law will pave the way for new services to emerge. “The new act allows for hedge funds and mutual funds. The changes will also bring in the possibility for crowdfunding and peer-to-peer lending,” Mr Dayaratne notes. 

“The new rules create new opportunities on the exchange,” Mr Fernando adds. “Derivatives and securitised products can be developed, and collective investment schemes [created]. We will see new services and allow short selling. There will be better risk management, which will allow for the more risk-driven market.” 

Further, the SEC of Sri Lanka and CSE appointed a joint committee to set up a central counterparty (CCP) mechanism to prevent failures in trade settlement that was developed following a provision in the act. Approved during December 2021, the CCP is expected to be operational by the end of 2022. It acts as a counterparty to both sellers and buyers in a transaction, collecting funds and providing guarantees on the terms of trade, and providing enhanced post-trade risk management. 

While Sri Lanka has made itself a more attractive and safer bet for investors, the fallout from the financial crisis may well roll on for some time, leaving it in a less favourable economic position than some of its neighbours. Whether foreign investors are willing to take the risk, however, remains to be seen.  


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