Former Central Bank Governor Explains High ISB Borrowing Amid Criticism

COLOMBO (News 1st);  Dr. Indrajith Coomaraswamy, former Governor of the Central Bank of Sri Lanka, has defended the significant increase in International Sovereign Bonds (ISBs) during his tenure, addressing criticisms and explaining the rationale behind the financial decisions made between 2015 and 2019.

Dr. Coomaraswamy clarified that the rise in ISBs from USD 5 billion to USD 15 billion was a strategic move to stabilize the country's financial situation.

He emphasized that USD 5 billion of this increase was due to the switching of instruments, which aimed to enhance the maturity profile and reduce the cost of external borrowings. By transitioning from volatile rupee securities and swaps to more stable ISBs with longer maturities, the Central Bank sought to improve financial stability and lower borrowing costs.

He noted that the decision to increase ISB borrowing was not taken lightly. The shift was necessary to replace highly volatile portfolio investments and short-term swaps with more stable, long-term debt instruments. This move not only reduced the cost of borrowing but also increased the stability of financial flows, which was crucial for maintaining economic stability.

Dr. Coomaraswamy also addressed the context of the USD 4 billion raised in 2019.

Despite the challenges posed by the Easter bombings and the anticipated change in government, the markets remained willing to provide funds. This confidence was largely due to the proactive financial management strategies implemented, such as the Active Liability Management Act and the medium-term debt management strategy. These measures demonstrated the government's commitment to managing the country's debt responsibly.

Furthermore, he pointed out that 89% of the total debt undertaken between 2015 and 2019 was used to repay previous debt. This approach was essential to avoid default and maintain access to international capital markets. By extending the maturity of debt and reducing reliance on short-term instruments, the Central Bank aimed to create a more sustainable debt profile.

Dr. Coomaraswamy stated that the borrowing strategy was designed to build financial resilience and provide a buffer for the incoming government. This buffer was intended to give the new administration time to reassess and potentially adjust economic policies without immediate financial pressure.