Sri Lanka De-facto Restructured some External Debt to India's RBI into a $2.6bn Swap
Asian Currency Union (ACU) liabilities & SAARC swap amounting to $2.6bn
Sri Lanka owes about $2.2bn in ACU credit and $400mn swap to India, via the two countries’ central bank. The IMF staff report on the first review of the EFF program has confirmed these two will be combined into one $2.6bn bilateral swap and repaid to RBI in tranches through 2023-2026. Given that these two facilities were initially provided in early-2022 as short-term instruments, this is essentially a de-facto restructuring, and we are finally rid of the uncertainty of when they’d be repaid.
Background to the two liabilities
Earlier in the year I highlighted that Indian emergency financing facilities to Sri Lanka in 2022 amounted to about $4bn, of which about $3.3bn was utilized in 2022. The biggest portion of this financing came through $2bn in Asian Clearing Union (ACU) trade liabilities. A further $400mn swap was provided by the Reserve Bank of India (RBI). At the point of being provided in early 2022, it was unclear what the duration of these facilities were and at what point Sri Lanka had to repay them. Given Sri Lanka’s sovereign default and low forex reserves until mid-2023, their repayments were continuously pushed back. And coming into late-2023 there was no clarity on whether Sri Lanka will have to repay substantial portions of these two liabilities (ACU & RBI swap) in 2023 and 2024. The external debt repayments Sri Lanka would have to facilitate in these years changes drastically depending on the assumptions taken for them.
The ACU allows for clearing of net liabilities every 2-month through the 6-member Central Bank. Typically, this facility provides about $200-500mn in net trade credit liabilities to Sri Lanka for 2-month periods, largely used for trade with India, reducing the use of foreign currency. In 2022, Sri Lanka was allowed to run upto $2bn in trade credit and not repay every 2-months. While the ACU does allow for short-term swap facilities to help members extend repayment period of outstanding credit in emergencies, what Sri Lanka was provided was extraordinary.
The $400mn RBI swap was provided in January 2022 as the standard 6-month SAARC-facility that Sri Lanka has regularly accessed. But was later extended in tenure continuously. While the 2021 $200mn swap from Bangladesh was repaid fully by Sept 2023, the RBI swap has remained outstanding.
Figure: Outstanding ACU & SAARC swap, $ billion
Both of these are liabilities of CBSL and repayment would have to be from its forex reserves. Current usable gross reserves of about $2.2bn (excluding the unusable RMB 10bn PBOC swap) are too low for repayment. Having the two liabilities without a set repayment schedule would have continued uncertainty and created tension with other external creditors. It’s also impossible for the IMF to create a projection for Sri Lanka’s balance of payments and forex reserves situation without credible assumptions on the repayments to RBI on ACU and the swap.
“There are significant expected net drains on gross reserves over the program period, with the largest being repayments on restructured debt, and payments on central bank credit lines including US$2.6 billion for the ACU repayments and the RBI SAARC swap.”
IMF in First Review of EFF program - December 2023
Hence the creation of a $2.6bn mega swap
The IMF report clearly states that there is a penalty interest cost attached to the ACU liability on account of the late repayment. Ofcourse, Sri Lankas has not been repaying to ACU from January 2022 onwards. As a result it seems about $200mn in penalty interest has been added, increasing the liability from ~$2bn to $2.2bn.
“The CBSL and the Reserve Bank of India (RBI) agreed to settle arrears on the Asian Clearing Union (ACU) balances by turning these liabilities and associated penalty interest (due to late payments) into a special swap (US$2.2 billion) and combining it with the RBI South Asian Association for Regional Cooperation (SAARC) swap (US$400 million). These liabilities (US$2.6 billion) will be paid during 2023-26.”
IMF in First Review of EFF program - December 2023
I also noted this increase ACU liability in the CBSL’s end-Sept 2023 balance sheet released at end-Oct. This indicated an agreement with RBI was likely reached on this de facto restructuring in Sept-Oct 2023. There was also significant changes to the pre-determined net drains data at end-Sept of a magnitude that indicated changes were being made to the ACU. In the pre-determined net drains data for the next 12-months (which covers central govt & CBSL forex payments), the ACU was recorded under the financial liabilities related outflows until end-Aug 2023. But by end-Sept, this category had net reduced by $2bn (the size of the ACU) and the liabilities related to swaps had net increased by about $500mn, indicating an increase in swap liabilities.
Figure: Pre-determined net FX drains for next 12-months, $ billion
The IMF’s external financing projections figures can be interpreted to provide a rough repayment schedule for this $2.6bn swap during 2023-2026. Under the “Other central bank liabilities, net”, there are net repayments of $900mn in 2024, $900mn in 2025 and $555mn in 2026 for a total for $2.355bn (reflected in Table 4a. Sri Lanka: Balance of Payments, 2019-28 (Restructuring Scenario) as well). Assuming these relate fully only to the new $2.6bn swap, then it implies a $245mn repayment in December 2023 as well.
This implied repayment schedule for the new $2.6bn swap in the December 2023 IMF report actually reduces the repayments assumed on the ACU & SAARC swap in the IMF program projections back in March 2023. That assumed repayments to ACU of $736mn in 2023 & $997mn in 2024 and $400mn RBI swap repayment in 2024. Therefore, the de facto restructuring of these two liabilities into the new swap has reduced 2023 repayments by around $500mn and 2024 repayments by $500mn, by extending the repayment period upto 2026.
Figure: ACU & SAARC swap repayment assumption implied from IMF reports,
$ billion
Significance of this de facto restructuring
Of course neither the ACU liabilities nor the SAARC swap fall within the official external debt restructuring parameters. But their repayment has a bearing on the availability of forex to service the external debt that is to be restructured, the ability to accumulate forex reserves, and implicitly the availability of forex to finance import recovery as the economy recovers.
Trade credit and bilateral swaps are usually handled on a bilateral basis during crisis periods, with no transparency on the terms under which they are modified. Questions to the CBSL from the media about the ACU repayment schedule had been met with the standard response of it being a bilateral matter between the two central banks.
The details in the IMF report indicates that the new $2.6bn swap will also be provided a guarantee from Sri Lanka’s Treasury, making it a contingent liability of the Sri Lankan government and not just a direct liability of CBSL. This is revealed because the government had to get the IMF to increase the ceiling on Treasury Guarantees to accommodate this. It also reveals that the new swap will be repaid in monthly installments, which helps explain the pre-determined net drains data from Sept-2023 onwards.
“an increase in the IT [indicative target] on the limits on treasury guarantees from Rs. 1,700 billion to Rs. 2,100 billion to account for the guarantee of the Special Swap Agreement of about US$2.6 billion between the CBSL and the Reserve Bank of India to restructure the outstanding liabilities under the Asian Clearing Union (ACU) agreement (including past due interest) and Bilateral SAARC Swap Agreement, which will be repaid through monthly installments over the next 3 years”
IMF in First Review of EFF program - December 2023
Through the repayment extension to 2026, the RBI has contributed implicitly to a limited extent to debt relief in the near term and increased the CBSL’s space to maneuver in terms of foreign currency and reserves in 2024. Especially to meet the IMF expectation of raising gross reserves from $3.6bn at end-Nov to $3.8bn at end-2023 and further to $5.3bn at end-2024.
Another important matter is whether the restructuring of the ACU liabilities into a swap with the RBI means that the ACU facility once again becomes available to Sri Lanka as a means to handle import financing from the regional countries.
However, it also important to note that the repayments on the $2.6bn swap are not the only ones due to India during the 2023-2026 period. Repayments on the $1.5bn credit lines extended in 2022 were not halted or restructured. So they are ongoing, with about $560mn in repayments in 2023 alone, mostly on the $500mn oil credit line from EXIM Bank of India (based on data from External Resources Department via RTIs).
This is my analysis and reflects my opinions. The underlying work was done with and the Frontier Research team as part of the firm’s macro-intelligence and macro-analysis work.