Sri Lanka to Maintain 10 % Limit on Foreign Purchases of Rupee Debt

By Anusha Ondaatjie, 21st August 2009, www.bloomberg.com

Sri Lanka will refrain from raising the 10 percent limit it has on foreign purchases of rupee debt at least until end-2010 to shield local financial markets from volatility, the central bank said.

An exodus of funds triggered by the global credit-market crisis caused a drop in the island-nation’s international reserves to an eight-year low of $1.27 billion in March. A $2.6 billion bailout loan by the International Monetary Fund last month and an end to the 26-year old civil conflict in May has revived investor interest in the South Asian country. Money managers based abroad bought $875 million of local-currency bonds this week, the central bank said yesterday.

“We will accept future flows very carefully to make the 10 percent limit as there’s no budgetary pressure with concessionary loans coming in,” C.J.P. Siriwardena, head of the public debt department at the Central Bank of Sri Lanka, said in a telephone interview from the capital Colombo. “We had a bad experience last year which we somehow managed.”

Foreign holdings of local debt plunged to $19 million last year from as high as $700 million as funds pulled out of emerging-market assets to tide over a worldwide credit crunch. Policy makers in November 2007 doubled the limit to 10 percent of the country’s outstanding treasury debt and also allowed purchases of rupee-denominated treasury bills for the first time in May 2008.

Sri Lanka plans to call for bids from investment banks to jointly manage a sale of $500 million of dollar-denominated debt overseas, central bank Governor Nivard Cabraal said Aug. 19.

Overseas investors’ holdings have increased to about 6 percent, or $1.2 billion, after the purchases this week, Siriwardena said.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net.