Public Debt Management in Sri Lanka

Transcription

1 Public Debt Management in Sri Lanka Performance in 2010 and Strategies for 2011 and beyond Public Debt Department Central Bank of Sri Lanka

2 ISBN ii Printed at the Central Bank of Sri Lanka Printing Press, No. 58, Sri Jayewardenepura Mawatha, Rajagiriya, Sri Lanka Published by the Central Bank of Sri Lanka, No. 30, Janadhipathi Mawatha, Colombo 1, Sri Lanka

3 Message of the Governor Message of the Superintendent of Public Debt Purpose of this Publication Objective of Debt Management Our Mission Contents v vi vii viii ix 1. Highlights of Public Debt Management in Borrowing Target and Borrowing Strategy 5 Debt Level 7 The Structure of the Public Debt Portfolio 8 3. Interest Cost on Public Debt in Total Interest Cost 15 Interest Cost of Domestic Debt 15 Interest Cost of Foreign Debt 16 Debt Service Obligations 16 Total Debt Service Cost Market Operations in Overview 19 Primary Market Operations 19 Secondary Market Operations Public Debt Management in 2011 and Beyond 23 Overview 23 Debt Management Strategy 23 Mediaum-Term Debt Management Targets 24 Government Borrowing Requirement in Borrowing Strategy 27 Maturity Pattern Risk Management in Public Debt and Sustainability of External Debt 29 Management of Risk 29 Types of Risks 29 Sustainability of External Debt 31 Overall Debt Sustainability Performance of Primary Dealers 39 Introduction 39 Financial Performance 39 Review of External Operating Environment 40 Primary and Secondary Market Participation of Primary Dealers 41 Capacity Building in Debt Market 41 Special Appendix 47 Major Developments in the Government Securities Market in Sri Lanka 47 Institutional Framework for Public Debt Management 50 Primary Dealer System 51 Regulations Made by the Minster of Finance in terms of RSSO and LTBO 53 Directions Issued to PDs 53 Glossary 57 Statistical Appendix 59 iii

4 Box Articles Box 1 - Sri Lanka Issued its third International Sovereign Bond 11 Box 2 - Medium-Term Sovereign Rating Strategy for Sri Lanka 25 Box 3 - Appreciation of Japanese Yen caused Yen Loans excessively costly for Sri Lanka (Foreign Exchange Risk: A Case Study) 32 Box 4 - Critical Values of Debt Sustainability Indicators 38 Box 5 - Statutory Requirements for Primary Dealers 43 Box 6 - Developments in LankaSettle and LankaSecure in iv

5 Message of the Governor he Central Bank of Sri Lanka has been entrusted with the T responsibility of managing the Public Debt portfolio on behalf of the government since 1950, in terms of the Monetary Law Act No.58 of In 2010, Sri Lankan economy showed a strong growth momentum, reaping the dividends of peace. The post conflict environment in the country and the gradual recovery of the global economy enhanced the growth prospects for Sri Lanka. The favourable developments within the country led to low and stable inflation at mid single digit level, stable exchange rates and low interest rates. The official reserves continued to grow steadily with the standby arrangement with the IMF progressing well and inflow of foreign funds through foreign investments in Sri Lanka government debt securities. With these favourable developments in the macroeconomic environment, Sri Lanka continued to invest in country wide mega infrastructure projects to facilitate private sector investments and thereby further economic growth. It is essential for the government to continue with its high investment drive in developing economic and social infrastructure in order to meet its economic targets in the medium-term in the post war era. However, the elevation of Sri Lankan economy to a middle income emerging market status limits the country s ability to access the concessional funding from multi-lateral and bi-lateral sources to finance the government s public investment programme. This has compelled the government to search for alternative funding sources to finance the fiscal gap in the capital budget. Having kept its mark in the international capital market in 2007 with the debut sovereign bond issue, Sri Lanka was able to conclude its third sovereign bond issue successfully, in The bond issue of US Dollar 1,000 million with a maturity of 10 years was executed at the coupon rate of 6.25 per cent per annum. Though the global capital market was not fully recovered from the recession, the bond issue attracted bids exceeding 6 times the offered amount mainly due to favourable developments in the economy and the country s unblemished track record in debt servicing. The enhancements in country ratings given by rating agencies also played a vital role in the successful execution of the bond issue. The relatively low cost funds from the bond issue were mainly utilized to restructure the public debt portfolio by retiring high cost debt. Raising of more funds, mainly to finance the capital budgetary requirements resulted in an increase in the total public debt stock from Rs. 4.2 trillion at end 2009 to Rs. 4.6 trillion at end However, I am happy to note that the Debt/GDP ratio which increased in 2009 reversing the declining trend that prevailed for four consecutive years until 2009, once again recorded a decline to 81.9 per cent at end 2010 in line with the medium-term targets. I congratulate the Superintendent of Public Debt and his team for their efforts in managing the public debt portfolio effectively, and wish them all the best in their future endevours in driving the public debt in the correct path corresponding to the higher growth expectations in the economy. Ajith Nivard Cabraal Governor Central Bank of Sri Lanka v

6 Message of the Superintendent of Public Debt In 2010, effective management of the public debt portfolio was enabled with the adoption of a number of debt management strategies and favourable developments in the Sri Lankan economy during the year. The total borrowings were within the borrowing limit approved by the Parliament. During 2010, it was particularly aimed to mobilize funds at the lowest possible cost by issuing medium to long-term, market oriented treasury securities with a view to minimize the rollover risk of the public debt portfolio. Improved macroeconomic fundamentals in 2010 led to improve investor confidence both locally and internationally. Increased trading in the government securities market was evident from the significant growth in the turnover ratio in government securities in 2010, indicating improved confidence among the local investors. Confirming the confidence of foreign investors in the Sri Lankan economy, the country was able to issue its third sovereign bond for a longer maturity at a relatively low cost. Further, there were four Sri Lanka Development Bond (SLDBs) issues during the year and it was able to issue SLDBs with 3 year maturity instead of 2 year maturity. The above events extended the maturity structure of foreign debt and also changed the composition of domestic and foreign debt favourably. At the same time, a noticeable increase in the foreign investments in rupee denominated treasury securities was evidenced during the year. In line with the medium-term debt management strategy, the funds generated through the sovereign bond issue was utilized to retire part of high cost domestic debt, reducing the cost of borrowing for the government. In addition, several steps were taken to improve public debt management function. This publication contains analysis and data on major aspects of public debt with the view of enhancing awareness of all stakeholders in public debt and transparency of public debt management. I take this opportunity to thank the Governor and senior management of the Bank for their assistance and members of my staff for their unparalled efforts in effective management of public debt portfolio while addressing the stability and development requirements in the government debt securities market. vi S.S.Ratnayake Superintendent of Public Debt Central Bank of Sri Lanka

7 Purpose of this Publication The responsibility of management of public debt in Sri Lanka has been entrusted to the Central Bank of Sri Lanka under the Monetary Law Act No.58 of This function needs a high level of professionalism, analytical ability, awareness and confidence of all stakeholders including lenders and investors in government securities. The public debt stock as at end 2010 stood at Rs. 4.6 trillion consisting of domestic debt of Rs. 2.6 trillion and foreign debt of Rs. 2.0 trillion. Foreign debt constitutes loans received from a number of multi-lateral institutions, bi-lateral loans and other commercial debt in different currencies. The size and the diversity of the public debt portfolio demand a high level of analysis and sharing of information. To fulfill this need, the Central Bank of Sri Lanka first started in 2007, publishing information with regard to its public debt portfolio and the debt management function, aiming to enhance the transparency of the debt management function and continued it for each subsequent years. This publication is the fifth annual publication. This publication includes information with regard to public debt management strategies adopted in 2010, movements in debt stock during the year, costs and risks of the debt portfolio, primary and secondary market operations on government securities and performance of primary dealers. A number of statistical tables giving data relevant to public debt and government securities market are also included. This publication is issued in Sinhala, Tamil and English languages. vii

8 Objective of Public Debt Management The objective of public debt management is to ensure that the government s financing needs are met at the lowest possible cost consistent with a prudent degree of risk, and to develop and strengthen the government securities market, while enhancing efficiency and maintaining stability. Although the strategic objective to be pursued in public debt management has not been made explicit by any law in Sri Lanka, it is implicitly understood that public debt management should be carried out in such a way as to: Minimize the direct and indirect cost of public debt on a long-term perspective; Avoid volatility in debt service cost and guarantee a balanced distribution; Prevent an excessive concentration on redemptions, thereby minimize any type of rollover risk/refinancing risk; Promote an efficiently functioning government securities market. viii

9 Our Mission Raising funds required to meet the cash flow needs of the government at the lowest possible cost. Maintaining and updating the country s public debt register. Servicing foreign and domestic debt obligations on time. Maintaining the risk of the debt portfolio at an acceptable level. Promoting a well functioning debt securities market. Advising the Ministry of Finance on the appropriate public debt management strategy, taking into account both prevailing and emerging macroeconomic and market conditions. Developing and improving the infrastructure relating to the public debt management and maintaining and upgrading the same. ix

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11 1. Highlights of Overall Borrowing and Debt Level Actual gross borrowing of Rs billion in 2010 was within the Parliament approved annual borrowing limit of Rs. 980 billion. Total borrowing from domestic sources was Rs billion while total borrowing from external sources was Rs billion. Total outstanding public debt stock stood at Rs. 4,590.2 billion at end 2010 recording an increase of Rs billion compared to the level at end As a percentage of GDP, total outstanding debt stock declined from 86.2 per cent at end 2009 to 81.9 per cent at end 2010, recording the second lowest debt/gdp in 24 years. Domestic debt to GDP ratio declined from 49.8 per cent at end 2009 to 45.8 per cent at end 2010 and foreign debt to GDP ratio decreased from 36.5 per cent at end 2009 to 36.1 per cent at end The share of domestic debt in total debt stock was 56 per cent while the share of foreign debt in total debt stock was 44 per cent at end Interest Cost on Public Debt Total interest cost on public debt increased by 14 per cent in 2010 to Rs billion consisting of Rs billion on domestic debt and Rs billion on foreign debt. As a percentage of GDP, interest cost of government borrowings declined marginally from 6.4 per cent in 2009 to 6.3 per cent in Average cost of domestic borrowing through Treasury bills and Treasury bonds declined in 2010 to 8.32 per cent and 9.45 per cent respectively, compared to per cent and per cent, respectively, in Interest Rates and Yield Curve Primary market yield rates on Treasury bills and Treasury bonds of different maturities dropped and this drop ranged between bps and bps, respectively, in The drops in the secondary market yield rates of Treasury bills and Treasury bonds ranged between 37 Public Debt Management in Sri Lanka

12 bps to 268 bps during the year, causing a downward shift in the yield curve. The benchmark yield curve on government securities was extended up to 10 years with the issue of 10- year Treasury bond in A 10-year international sovereign bond denominated in US Dollars was issued at the interest rate of 6.25 per annum, and as a result the yield curve of Sri Lankan sovereign bonds extended up to 10 years. 4. Broadening of the Investor Base Number of investors in government securities as recorded in the Central Depository System (CDS) of LankaSecure increased by 13.5 per cent to 73,396 by end The third international sovereign bond for US Dollars 1,000 million with 10-year maturity was issued in October The value of bids for this offering exceeded six times the offered amount. The offered amount was allocated to 262 investors, with substantial diversity, in proportion to their bids. Maturing Sri Lanka Development Bonds (SLDBs) amounting to US Dollars million were reissued during the year. The turnover ratio of government securities in the secondary market increased to 22.5 times the average government securities stock in 2010 from 16.1 times in Infrastructure Developments LankaSettle and LankaSecure introduced participant managed Intraday Liquidity Facility (ILF), which enables the participating institutions to carryout multiple ILF requests and reversals as per their requirement during the operating schedule of the business day. Upgrading of LankaSettle and LankaSecure (new version 3.5) introduced many new features to make the day-to-day business operations more efficient and effective. LankaSecure system introduced an account named DOB (Domestic Operations Security Borrowing) Account in the LankaSecure system to record the government securities borrowed by the Central Bank under the government securities borrowing programme. 6. Market Development Activities The Public Debt Department conducted 18 public investor awareness programmes and 2 educational seminars as part of market development activities. Sixty-one radio programmes were broadcast jointly with Sri Lanka Broadcasting Corporation to improve awareness of the public on government securities. The Public Debt Department participated in 12 live-tv discussions that telecast locally as part of the public awareness programme. Public Debt Management in Sri Lanka

13 7. Primary Dealer System The Primary Dealer (PD) industry performed financially well during 2010 and all key financial indicators including Risk Weighted Capital Adequacy Ratio, Capital Base, Return on Assets, and Return on Equity showed improvement during the year. Total portfolio of PDs increased from Rs billion at end 2009 to Rs billion at end Risk indicators were maintained within prudent levels. Bank PD units recorded the highest effective participation levels at the primary auctions for both Treasury bills and Treasury bonds. 8. Sovereign Rating A dedicated Sovereign Rating Committee (SRC) was appointed by the Monetary Board in March 2010, to work towards achieving investment grade rating in line with the Medium-Term Sovereign Rating Strategy. Sovereign rating of Sri Lanka was upgraded by the sovereign rating agencies in Public Debt Management in Sri Lanka

14 Public Debt Management in Sri Lanka

15 2. Public Debt Management in 2010 Borrowing Target and Borrowing Strategy The total gross borrowing limit approved by the Parliament for the year 2010, in terms of Appropriation Act No 07 of 2010, amounted to Rs. 980 billion. In borrowing to meet the financing requirement of the government subject to the limit approved by the Parliament, the annual borrowing programme expected to raise Rs billion from domestic sources and the balance of Rs billion was targeted from foreign sources. On net basis, the total fund mobilisation through the borrowing programme was targeted at Rs billion. Of this total, Rs billion was expected to be raised from domestic sources, while Rs billion was targeted from foreign sources. The annual borrowing strategy for 2010 was designed in line with the medium-term public debt management strategy and policies identified by the Central Bank of Sri Lanka (CBSL). The main objective of this strategy was to mobilize funds at the lowest possible cost, while achieving the annual targets in the medium-term debt management strategy. Following the targets, it was planned to issue more market oriented treasury securities with medium to long-term maturities in order to minimize the rollover risks involved in the public debt portfolio. Further, there were plans to extend long-term yield curve for the government securities by issuing longer-term benchmark maturities on regular basis. The borrowing strategy intended to maintain a proper balance between domestic and external borrowings and hence, increase the efficiency in the debt market. It also focused to tap Table 1 Government Borrowings (a) Rs. billion 2010 Original Plan (b) 2010 Actual (c) Net Borrowing Domestic Foreign Total Gross Borrowing by Instrument Domestic Rupee loans - - Treasury bonds Treasury bills SLDBs/OBU Loans CBSL advances Other Foreign (d) Concessional Non-Concessional Total Sources : Central Bank of Sri Lanka Ministry of Finance and Planning (a) Book value (b) Net borrowings as per Budget (c) Provisional (d) Excludes disbursements of Rs billion of the loan involving phase II of the Puttalam Coal Power Project new investors in the international capital market in order to minimize the cost of borrowing by issuing securities at lower rates while broadening the investor base in the government securities market. Further, more emphasis was given to strengthening the participation of intermediaries in the government securities market, continuing the debt consolidation process and expanding and diversifying the local investor base in the government securities. Although it was able to maintain the total borrowings within the approved borrowing limit, the composition of the borrowing programme Public Debt Management in Sri Lanka

16 deviated from the originally planned programme for The improved investor confidence enhanced foreign fund inflows to the country. Hence, borrowing from foreign sources, at relatively low cost exceeded the expected level of foreign borrowing. Consequently, funds mobilized through domestic sources were lower than the amount expected in the original borrowing plan. Accordingly, the gross borrowings from domestic sources amounted to Rs billion, below the originally targeted amount of Rs billion, while gross borrowing from foreign sources exceeded the original target of Rs billion by Rs billion to reach Rs billion. Funds raised through concessional sources for projects and programmes contributed Rs billion to the external borrowing programme. Further, funds mobilized through commercial borrowing by attracting foreign investors to the Treasury bills and Treasury bonds and raising funds from the international capital market through issue of a sovereign bond were amounted to Rs. 164 billion. Owing to the renewed investor confidence since the end of the conflict, successful continuation of the Stand-By Arrangement by the International Monetary Fund (IMF), and the stability in the foreign exchange market, a significant improvement was observed in nonresident investments in Treasury bills and Treasury bonds. Accordingly, the non-resident investments in government securities reached Rs billion, in terms of face value, at end 2010 with a total increase of Rs billion during the year. This helped to ease the pressure on domestic borrowings and extended the maturity structure of the domestic currency debt stock as Treasury bonds with longer maturities could be issued to non-residents. Further, the Sri Lanka s third international sovereign bond amounting to US Dollars 1,000 million was issued. The value of bids to the offer was over 6 times the offered amount. The 10 year bond was priced at par with a coupon rate of 6.25 per cent per annum. This was significantly lower than the coupon rate on the second 5 year sovereign bond issue in 2009 with the coupon of 7.40 per cent per annum. The funds received were mainly used to restructure the government debt stock by retiring a significant portion of high cost short-term government debt. During the first five months of the year 2010, the interest rates moved upward significantly due to the high interest rate expectations in the market. Therefore, investors were reluctant to invest in medium to long-term domestic debt instruments. Hence, domestic borrowing had to be mobilized largely through relatively short-term instruments in order to minimize the cost of the borrowing and to lessen the upward pressure on interest rates. Funds raised through short-term domestic debt instrument (Treasury bills) increased to Rs billion in 2010 against the original target of Rs. 40 billion. This adversely affected the duration and average time to maturity of the domestic debt stock. However, from June to September 2010, the interest rates gradually moved downwards causing a downward shift in the yield curve and thereafter evidenced a low volatility in yield rates. The monetary policy measures adopted in response to the reduction in inflation and also to stimulate economic activities; low interest rate expectations of investors; foreign currency inflow through foreign investment in government securities; enhanced liquidity situation in the market; and the prudent debt management strategies adopted by the Public Debt Department (PDD) were the key factors contributed to lower the interest rate structure in the government securities market. With the investor confidence built up, PDD was able to issue Treasury bonds of Rs billion with medium to long-term maturities. In addition, Rs billion (US Dollars 628 million) was borrowed in 2010 through issue of SLDBs with maturities of 2 and 3 years. Further, continuing the intention of lowering the non-tradable debt stock in the domestic debt portfolio, it was decided not to raise funds through Rupee loans during the year The gradual decline in yield rates during June to September and relative stability in the market thereafter enabled PDD to issue Treasury bonds with maturities of medium to long-term. The volume of issue of Treasury bonds with 5-6 year Public Debt Management in Sri Lanka

17 maturities were 34 per cent of total Treasury bond issuances in Further, PDD activated the long-term benchmark yield curve up to 10 years by issuing Treasury bonds with 8-year and 10-year maturities. On the net basis, total borrowings were estimated at Rs billion in Of this total, Rs billion and Rs billion were expected to be raised from domestic and foreign sources, respectively. However, the total net borrowings increased to Rs. 451 billion exceeding the original target by Rs. 4.3 billion. Debt Level The Debt to Gross Domestic Product (GDP) ratio decreased significantly compared to the previous year, reflecting favourable debt dynamics during the year The total outstanding debt stock was Rs. 4,590 billion at end 2010, recording an increase of Rs. 429 billion compared to Rs. 4,161 billion at end The domestic and foreign debt stock increased by Rs. 165 billion and Rs. 265 billion, respectively. The total public debt as a percentage of GDP (Debt to GDP ratio) decreased to 81.9 per cent at end 2010, compared to 86.2 per cent at end This TABLE 2 Outstanding government Debt Outstanding Debt (Rs. bn)-by Source (a) Domestic 2,140 2,401 2,566 Foreign (b) 1,449 1,760 2,025 Total 3,589 4,161 4,590 Outstanding Debt (Rs. bn)-by Currency Domestic Currency 1,973 2,393 2,613 Foreign Currency (b) 1,615 1,769 1,977 Total 3,589 4,161 4,590 Outstanding Debt (% of GDP)-By Source Domestic Foreign (b) Total Outstanding Debt (% of GDP)-By Currency Domestic Currency Foreign Currency (b) Total Sources: Central Bank of Sri Lanka Ministry of Finance and Planning (a) Provisional (b) Excludes loan involving phase II of the Puttalam Coal Power Project (outstanding of Rs billion as at end 2010) Rs. billion CHART 1 CENTRAL GOVERNMENT DEBT 5,000 4,000 3,000 2,000 1,000 0 reduction of the ratio reflects that the rate of growth in debt stock was below the rate of growth of nominal GDP during the year and it was consistent with the declining trend of the Debt to GDP ratios recorded up to end TABLE 3 Increase IN Outstanding Government Debt Rs. billion Description (a) Net Borrowing Effect of Parity variance (5) Discount Effect (13) Other 5 30 (5) Total Increase (a) Provisional Outstanding Debt (LHS) % of GDP (RHS) Per cent Sources: Central Bank of Sri Lanka Ministry of Finance and Planning TABLE 4 CHANGE OF DEBT IN RUPEE TERMS DUE TO PARITY VARIANCE BY CURRENCY Rs. billion Currency (a) Special Drawing Rights (10.2) Japanese Yen (3.4) 44.4 US Dollar (1.4) 7.9 (25.9) Euro (1.4) 2.2 (14.0) Other Total (4.7) Memo: End Year Exchange Rates (Sri Lanka Rupees per Unit of Foreign Currency) Special Drawing Rights Japanese Yen US Dollar Euro (a) Provisional Sources: Central Bank of Sri Lanka Ministry of Finance and Planning Public Debt Management in Sri Lanka

18 The appreciation of the Sri Lanka rupee against major foreign currencies resulted in reducing the existing debt stock in rupee terms, by Rs. 5 billion, while the issuance of Treasury bonds at a premium also affected the final valuation of debt stock by Rs. 13 billion. Per cent CHART 2 COMPOSITION OF CENTRAL GOVERNMENT DEBT Domestic By end 2010, the domestic and foreign debt stock (source wise) increased to Rs. 2,566 billion and Rs. 2,025 billion from Rs. 2,401 billion and Rs. 1,760 billion respectively, compared to The domestic currency debt stock increased by 9.2 per cent to Rs. 2,613 billion at end 2010, compared to Rs. 2,393 billion at end As a percentage of GDP, the domestic currency debt stock decreased by 3.0 percentage points from 49.6 per cent at end 2009 to 46.6 per cent at end 2010.The foreign debt stock, in Rupee terms, increased to Rs. 2,025 billion at end This was mainly due to the increase in non-resident investments in Treasury bills and Treasury bonds and the issuance of the third international sovereign bond of US Dollars 1,000 million in As a percentage of GDP, the foreign currency debt stock decreased to 35.3 per cent at end 2010 from 36.7 per cent at end The Structure of the Public Debt Portfolio Composition of Domestic Debt Foreign The share of domestic debt as a percentage of the total debt stock as well as a percentage of GDP decreased during the year Although the total domestic debt stock increased by Rs. 165 billion to Rs. 2,566 billion by end 2010, the share of domestic debt as a percentage of the total debt stock decreased from 57.7 per cent at end 2009 to 55.9 per cent at end 2010, while the domestic debt to GDP ratio decreased from 49.8 to 45.8 per cent. These decreases were mainly due to the shift of borrowings to foreign sources as a measure of debt management strategy. The issuance of the sovereign bond, increase in non-resident investments in Treasury bills and Treasury bonds and settlement of high cost borrowings utilizing the proceeds of the international sovereign bond were the key reasons of the decrease. Rs. billion CHART 3 DOMESTIC DEBT 3,000 2,500 2,000 1,500 1, Further, following the medium-term debt management strategy, the PDD mobilized funds mainly through medium to long-term tradable securities. Accordingly, it was decided not to raise funds through Rupee loans, which is a non-tradable instrument. Therefore, the share of the Rupee loan stock decreased to 3 per cent of total domestic debt (Rs billion) at end 2010 from 5 per cent at end In addition, as part of debt management CHART 4 Outstanding Debt (LHS) % of GDP (RHS) COMPOSITION OF GOVERNMENT DOMESTIC DEBT - AT END 2010 SLDBs 7% Rupee loans 3% OBU Loans 1% T-bonds 64% Other 5% T-bills 20% Per cent Public Debt Management in Sri Lanka

19 strategy, high cost debt issued as loans obtained from Offshore Banking Units (OBUs) of commercial banks, government overdrafts from two state banks, and part of other loans were settled utilizing the funds received from the international sovereign bond in As a result, the non-tradable debt as a percentage of the total outstanding domestic debt reduced to 9 per cent at end 2010 from 12 per cent at end Consequently, the share of the tradable securities of the outstanding domestic debt increased from 88 per cent at end 2009 to 91 per cent at end During the year, government reissued the maturing Sri Lanka Development Bonds (SLDBs) issued in US Dollars, in order to utilise the foreign currency funds available in the market at favourable rates. Accordingly, foreign currency domestic debt as a percentage of total debt stock remained unchanged at 7 per cent at end Domestic Debt by Investor Base The investor-wise classification indicated that the larger share of outstanding domestic debt was held by the non-bank sector as at end The non-bank sector investors such as the Employees Provident Fund (EPF), National Savings Bank (NSB), insurance companies, and other institutional funds had mainly invested in government securities with medium to long-term maturities. The share of nonbank sector investments as a percentage of the total domestic debt stood at 73 per cent at end CHART 5 DOMESTIC DEBT BY INVESTOR - AT END 2010 Departmental and Other Official Funds 6% Insurance and Finance Companies 1% Private and Other 20% Savings Institutions 11% Central Bank 3% Non-bank sector investments in government securities amounted to Rs. 1,874 billion as at end 2010 recording an increase of Rs. 179 billion compared to the pervious year. Public Debt Management in Sri Lanka Employees' Provident Fund 35% Commercial Banks 24% Non-bank sector investments in Treasury bills and Treasury bonds increased by Rs. 48 billion and Rs. 157 billion, respectively during the year under review. However, the non-bank sector investments in Rupee loans decreased by Rs. 25 billion. Investments in other instruments by nonbank sector also decreased by Rs. 629 million by end Per cent CHART 6 OWNERSHIP OF MAIN DEBT INSTRUMENTS - AT END T-bills T-bonds R-loans Non-Bank Sector Central Bank Commercial Banks Of the total non-bank sector investments in governement securitites Rs. 861 billion (46 per cent) had been made by EPF. The contribution of NSB was Rs. 287 billion (15 per cent ) as at end However, the share of EPF and NSB in the total non-bank sector investments decreased to 61 per cent at end 2010 from 63 per cent at end The total domestic debt held by the banking sector consisting of commercial banks and CBSL amounted to Rs. 692 billion at end 2010, and it recorded a decrease of Rs. 14 billion compared to end Out of the total banking sector holdings, Rs. 613 billion ( 89 per cent), was held by the commercial banking sector, while Rs. 78 billion ( 11 per cent) was held by the CBSL. Maturity Structure of the Domestic Debt The debt maturing within one year was Rs. 977 billion (including maturing Treasury bills of Rs. 514 billion) or 40 per cent of the domestic debt at end 2010 compared with 39 per cent recorded at end During the latter part of 2010, the market showed growing preferences towards medium-term

20 Treasury bonds. Accordingly, comparatively longer-term maturities were issued to the market in the second half of Average time to maturity of the Treasury bonds issued in the second half of 2010 was 4.4 years compared to 2.6 years issued in the first half of PDD expects to increase the medium to long-term portion of the domestic debt stock further, by issuing and activating more medium and long-term Treasury bond series, while accessing new investors to the domestic Treasury bond programme. Rs. billion Rs. million CHART 7 MATURITY STRUCTURE OF TREASURY BONDS AND RUPEE LOANS CHART 8 WEEKLY MATURITY PROFILE OF TREASURY BILLS IN 2010 a 24,000 20,000 16,000 12,000 8,000 4, Beyond Jan T-bond R-loan Beyond Jan 02 Mar 01 Apr 01 May 31 May 30 Jun 30 Jul Maturity Date a Effect of early retirement of Treasury bills has been excluded 29 Aug 28 Sep 28 Oct 27 Nov 27 Dec TABLE 5 DURATION AND AVERAGE TIME TO MATURITY (ATM) OF DOMESTIC CURRENCY DEBT (AS AT END OF YEAR) Instrument maturing short-term Rupee loans, the duration of the Rupee loans increased from 3.58 years in 2009 to 3.99 years in In 2010, PDD continued its borrowing strategy to ease the weekly and monthly bunching pressure by limiting the issue of 91-day and 182-day Treasury bills and increasing the issue of 364-day Treasury bills. Further, it was able to issue more Treasury bonds with 5-year, 6-year and 10-year maturities. The share of Treasury bonds with 5-year and 6- year maturities in Treasury bond issuances in 2010 were 20.6 per cent and 13.4 per cent respectively. Foreign Debt Duration (a) (Years) Average Time to Maturity (Years) Treasury bills Treasury bonds Rupee loans Overall (a) Weighted average maturity of the cash flows Source: Central Bank of Sri Lanka The foreign debt stock as at end 2010 amounted to Rs. 2,025 billion, an increase of Rs. 265 billion or 15 per cent compared to the position at end This was mainly due to the increase in government borrowings from foreign sources on a net basis to finance the budget. However, the foreign debt as a percentage of GDP decreased from 36.5 per cent at end 2009 to 36.1 per cent at end The issuance of third international sovereign bond of US Dollars Duration of Domestic Currency Debt Due to the strong investor preference towards Treasury bills and short-term Treasury bonds that prevailed largely during the first half of the year, the duration of the domestic currency debt stock decreased marginally to 1.74 years at end 2010 from 1.77 years at end At end 2010, the duration of Treasury bills increased marginally to 0.43 years while the duration of Treasury bonds reduced slightly to 2.01 years. As a result of redemption of Rs. billion CHART 9 FOREIGN DEBT 2,500 2,000 1,500 1, Outstanding Debt (LHS) % of GDP (RHS) Per cent 10 Public Debt Management in Sri Lanka

21 Box 1 - Sri Lanka issued its third International Sovereign Bond Sri Lanka tapped the international capital markets for the third time to raise US Dollars 1,000 million in October /. The bond was floated at a time when the global credit conditions started to ease with the recovery from the European financial stress. This bond issue established a benchmark for Sri Lanka and extended the yield curve on foreign currency denominated bonds beyond five years for the first time. The Bond was priced at par with a 6.25 per cent coupon, yielding a spread of 373 basis points (bps) over 10 year US Treasuries at the time of issue. This equated to a swap spread of approximately Mid Swap+370 bps, which meant the new issue was priced around 20 bps inside its own curve after taking into account the five year extension of the curve. The offer was of 144A/Reg.S Format with a maturity of 10 years. The coupon rate of 6.25 per cent was significantly lower than the cost of borrowing of the previous two international offerings in 2007 and The bond was rated at B+ by both Fitch Ratings and Standard & Poor s (S&P) and is listed on the Singapore Exchange. Bank of America Merrill Lynch, The Royal Bank of Scotland Plc and The Hong Kong and Shanghai Banking Corporation Ltd. were the joint lead managers and joint book runners for the Bond issue. The issue attracted an order book that exceeded US Dollars 6.3 billion within 14 hours of its opening, indicating the positive investor sentiment observing the progress and future prospects in the Sri Lankan economy. The offered amount of US Dollars 1,000 million was allocated to 262 investors. In terms of the geographic distribution, investors in the USA accounted for 52.5 per cent followed by Europe with 25 per cent and Asia with 22.5 per cent. By investor type, 85 per cent of the bond issue was allocated to fund and asset managers, while the balance was to pension funds, insurance companies and banks. With this bond issue, Sri Lanka established its presence in the global financial market and was able to extend its yield curve on foreign currency bonds up to 10 years. This bond issue also established a benchmark reference rate which would enable the private sector in the country to mobilize funds in the international capital markets. The country s improved economic fundamentals, positive investor sentiment, future growth potential, and the unblemished debt service record were key factors to the success of the Bond issue. Further, favourable assessment of the Sri Lanka economy by all three credit rating agencies helped prop up investors in the international sovereign bond float. Fitch Ratings affirmed Sri Lanka s Longterm foreign and local currency Issuer Default Ratings at B+, and revised the outlook to Positive from Stable. S&P raised the long-term foreign currency rating to B+ from B, with Stable outlook, while Moody s Investor Service in their first rating of Sri Lanka assigned B1 foreign currency issuer rating with Stable outlook. The proceeds of the third international sovereign bond issue amounting to Rs billion (net of expenses of the issue) were utilized to restructure the existing debt portfolio towards reducing the costs. Approximately, Rs. 55 billion was used for the retirement of Treasury bills held by the Central Bank of Sri Lanka as such holdings amidst excess liquidity in the market led to a high sterilization cost. Another Rs. 43 billion was used to settle high cost short-term bank borrowings, which were used for financing infrastructure projects during the first half of the year. The balance Rs billion was used to settle short-term foreign currency debt by taking advantage of interest rate differential. Accordingly, the bond issue did not increase the overall debt stock as the proceeds were used to replace certain existing debt. It also enabled to increase the maturity profile of the government s debt portfolio and helped improve the stability of the interest rate structure in the domestic market. 1/ The 1 st International Sovereign Bond of US Dollars 500 million was issued by the Government of Sri Lanka in October 2007 at 8.25 per cent and the 2 nd International Sovereign Bond of US Dollars 500 million was issued in October 2009 at 7.40 per cent. Public Debt Management in Sri Lanka 11

22 1,000 million and project and programme loans were the main contributory factors to the increase. The non-residents investments in Treasury bills and Treasury bonds also increased by a significant amount during the year The funds raised through bi-lateral and multi-lateral loans for specific projects and programmes accounted for 65 per cent of the total foreign debt stock. The project and programme loans were increased by Rs. 99 billion (7 per cent) at end The non-project loans, which consisted of trade credit, commodity loans, and other loans, CHART 10 FOREIGN INVESTMENTS IN TREASURY BILLS AND TREASURY BONDS amounted to Rs. 563 billion (an increase of 42 per cent) and accounted for 28 per cent of the total foreign debt as at end The commodity loans, including food loans, goods and services loans, and other commodity loans declined by 12 per cent during the year. The main reason for the increase in non-project loans was the issuance of third international sovereign bond of US Dollars 1,000 million. In addition, during the year, nonresident investments in Treasury bills and Treasury bonds also contributed by adding Rs. 55 billion. As at end 2010, non-resident investments in Treasury bills and Treasury bonds stood at Rs billion including Rs. 622 million investments by non-residents under the Diaspora programme. This accounted for almost 10 per cent of the total outstanding amount of Treasury bills and Treasury bonds. CHART 12 FOREIGN DEBT BY CONCESSIONALITY - AT END 2010 Non-Concessional Loans 37% Rs. billion Concessional Loans 63% Q1 Q2 Q3 Q 4 Q1 Q2 Q3 Q 4 Q1 Q2 Q3 Q 4 Q1 Q2 Q3 Q T-bill T-bond Total CHART 11 FOREIGN DEBT BY SOURCE - AT END 2010 Commercial Loans 30% Bi-lateral 37% Multi-lateral 33% As at end 2010, bi-lateral loans constituted 37 per cent of total external debt while multi-lateral loans and commercial loans constituted 33 per cent and 30 per cent respectively. When compared to the position at end 2009, the share of debt raised through bi-lateral and multi-lateral sources declined by 2 percentage points and 4 percentage points, respectively, while the funds raised through TABLE 6 Maturity, Grant Element & Interest Rates of External Debt 2010 Category Grace Period (Yrs) Repayment Period (Yrs) Grant Element (%) Avg. Interest Rates (a) (% p.a.) Bi-lateral Multi-lateral Commercial (14) Export credit (12) Average 1.9 (a) Interest paid in 2010/ Disbursed outstanding debt as at end 2009 Sources: Central Bank of Sri Lanka Ministry of Finance and Planning commercial sources increased significantly by 7 percentage points, mainly due to the issuance of the third international sovereign bond and nonresident investments in Treasury bills and Treasury bonds. Major bi-lateral lenders in 2010 were Japan (24 per cent of total external debt), China (3 per 12 Public Debt Management in Sri Lanka

23 cent) and Germany (2 per cent). Major multi-lateral lenders were Asian Development Bank (ADB) and the International Development Association (IDA), which contributed to 18 per cent and 14 per cent of the total external debt, respectively. The share of concessional loans in the total foreign debt decreased to 63 per cent at end 2010 from 72 per cent at end The share of non-concessional loans increased to 37 per cent at end 2010 from 28 per cent at end This trend is expected to continue in the future. TABLE 7 currency composition of foreign debt (AS at End of year) Currency (a) Special Drawing Rights Japanese Yen US Dollar Euro Sri Lanka Rupee (b) Other Total Memo: Total External Debt (Rs.billion) Per cent 1,449 1,760 2,025 Sources: Central Bank of Sri Lanka (a) Provisional Ministry of Finance and Planning (b) Non-residents investments in Treasury bills and Treasury bonds The average time to maturity of foreign currency debt had marginally decreased to 9.22 years at end 2010 from 9.26 years at end During this period, significant changes were not observed in the grace period, repayment period, and the grant element of the external debt stock of the Government of Sri Lanka (GOSL) compared to The average interest rate of foreign currency debt (excluding SLDBs and loans from OBUs) decreased CHART 13 CURRENCY COMPOSITION OF FOREIGN DEBT Euro 7.0% Sri Lanka Rupee 11.9% Other 4.1% SDR 28.3% TABLE 8 Use of External Debt by Major Sectors (AS at End 2010) (a) Rs. million Economic Sector Outstanding 1. Economic Services 1,200, Agricultural Development 166,626 Agriculture 44,012 Fishing 15,281 Forestry 6,458 Plantation 35,767 Irrigation & Related Activities 64,922 Livestock Development Industrial/Construction 493,530 Energy (b) 253,103 Water Supply 119,800 Industrial Development 27,328 Roads and Bridges 90,930 Other Construction 2, Service Sector 396,082 Telecommunications 39,981 Ports & Shipping 106,609 Ground Transport 148,693 Air Transport 17,186 Finance, Insurance, etc. 80,841 Trade 2, Other Economic Services 144,423 Land Development 549 Management & Institutional Development 3,325 Information Technology Development 5,574 Private Sector Development 75,034 Rural Development 57,544 Science & Technology 2, Social Services 222,464 Education & Training 51,430 Health & Social Welfare 19,253 Cultural 8 Environment 26,946 Housing & Urban Development 29,650 Labour & Vocational Training 5,793 Media 116 Rehabilitation 35,529 Sewerage 3,641 Tsunami Rehabilitation 50, Commodities & Food 54,653 Commodities 28,453 Food 26, Other Activities 546,805 Total Outstanding Debt 2,024,583 Sources: Central Bank of Sri Lanka Ministry of Finance and Planning US Dollar 23.5% Japanese Yen 25.1% (a) Based on Outstanding External Debt data recorded in CS-DRMS as at end December Sovereign bond issues in 2007,2009 and 2010, and Treasury bills and Treasury bonds held by non-residents are recorded under other activities. (b) Excludes loan involving phase II of the Puttalam Coal Power Project (outstanding of Rs. 50,097 million as at end 2010) Public Debt Management in Sri Lanka 13

24 to 1.9 per cent in However, except interest rate on export credit category, average interest rate on all other categories decreased compared to that of These reductions were mainly due to the drop in London Inter Bank Offered Rate (LIBOR) and reduction in interest cost due to the appreciation of Sri Lanka rupee against some major foreign currencies. The main reason for the increase of average interest rate on export credit was the increased loan flotation charges of major development projects. The currency composition of external debt of the GOSL at end 2010 showed that 84 per cent of total external debt was in Special Drawing Rights (28.3 per cent), Japanese Yen (25.1 per cent), US Dollars (23.5 per cent), and Euro (7.0 per cent). As a result of the appreciation of Sri Lanka rupee against major currencies except Japanese Yen, the share of Special Drawing Rights denominated external debt declined to 28.3 per cent of the total foreign debt at end 2010, while US Dollars denominated debt increased due to the funds raised through the sovereign bond issue of US Dollars 1,000 million in October Further, the Sri Lanka rupee denominated foreign debt increased consequent to higher non-resident investments in government securities. The debt raised through external sources was mainly used for the development of economic, social and administrative services of the country. Out of the total outstanding external debt, 59 per cent had been used for the development of economic services, 11 per cent for social services, 3 per cent to import commodities and 27 per cent for administrative and other unclassified activities in the economy. In TABLE 9 FOREIGN LOAN AGREEMENTS SIGNED DURING THE YEAR 2010 Category Number of Loans Amount (Rs million) Amount (USD million) Bi-lateral , Multi-lateral 15 86, Commercial 1 111,926 1,000 Export Credit ,036 1,265 Total ,257 4,012 Sources: Central Bank of Sri Lanka Ministry of Finance and Planning TABLE 10 outstanding foreign debt by source (AS at End 2010) (a) Category Number of Loans Amount (Rs million) Bi-lateral ,899 Japan ,931 China 10 56,459 Germany 42 50,263 USA 72 42,414 Other ,833 Multi-lateral ,936 ADB ,872 IDA ,217 Other 29 34,847 Export Credit (b) ,022 Commercial ,725 International Sovereign bonds 3 221,906 Non-resident investments in Treasury bills 57,317 Non-resident investments in Treasury bonds 183,538 Other 9 33,964 Total Loans 703 2,024,583 Sources: Central Bank of Sri Lanka Ministry of Finance and Planning (a) Provisional (b) Excludes loan involving phase II of the Puttalam Coal Power Project (outstanding of Rs. 50,097 million as at end 2010) the economic services category, a large portion of funds was utilised for the industrial and construction sectors, especially for the energy sector (13 per cent of the total debt). Other major economic sectors to which foreign funds were allocated, included ground transportation (7 per cent), water supply (6 per cent), port and shipping (5 per cent), road and bridges (4 per cent), and finance & insurance (4 per cent). In the social services sector, the major share was utilised for educational and training purposes (3 per cent) followed by tsunami rehabilitation activities (2 per cent). In 2010, the GOSL entered into 43 new external loan agreements compared to the 25 loan agreements in The total value of the new loan agreements amounted to Rs. 453 billion (US Dollars 4.0 billion) compared to Rs. 282 billion (US Dollars 2.5 billion) in At end 2010, there were 703 active foreign loans recording a net increase of 33 loans during the year Public Debt Management in Sri Lanka

25 3. Interest Cost on Public Debt in 2010 Total Interest Cost The total interest cost on government debt amounted to Rs. 353 billion in 2010 recording an increase of Rs. 42 billion (14 per cent) compared to 2009, while average debt stock increased from Rs. 3,875 billion in to Rs. 4,376 billion in However, the total interest cost on public debt as a percentage of GDP dropped to 6.3 per cent in 2010 from 6.4 per cent in This was mainly due to the improvements in debt management activities along with the macroeconomic developments in the country. The government spent 43 per cent of its total revenue on the interest obligations on public debt in 2010, compared to 44 per cent spent in TABLE 11 INTEREST COST ON PUBLIC DEBT Rs. billion Source/ Instrument (a) Domestic Debt Treasury bills (b) Treasury bonds (c) Rupee loans OBU Loans SLDBs Other Domestic (d) Foreign Debt (e) Total Interest Cost Sources: Central Bank of Sri Lanka (a) Provisional Ministry of Finance and Planning (b) Excludes Treasury bill interest payments to non-residents (c) Excludes Treasury bond interest payments to non-residents (d) Includes interest on overdraft facility taken from Commercial Banks, administrative borrowings etc. (e) Includes Treasury bill and Treasury bond interest payments to non-residents 1 Average of the outstanding total debt stock at end 2008 and at end Average of the outstanding total debt stock at end 2009 and at end Rs. billion CHART 14 TOTAL INTEREST COST Interest Cost of Domestic Debt The interest cost of domestic debt amounted to Rs. 297 billion in 2010, reflecting an increase of 8 per cent compared to 51 per cent increase recorded in 2009 and 15 per cent increase in This was mainly due to relatively low interest rate structure remained in the market, shifting in domestic funding to the foreign funding to some extent, and improvements in overall debt management strategies followed by the PDD during The reduction in the borrowing cost on Treasury bills in 2010 was higher than the reduction in interest cost on Treasury bonds due to the reduction in interest rates of Treasury bills in TABLE 12 Interest Cost (LHS) running cost RATIO (a) % of GDP (RHS) Instrument Treasury bills Treasury bonds Rupee loans Per cent Per cent Source: Central Bank of Sri Lanka (a) Interest Paid/Outstanding stock at the beginning of the year. Public Debt Management in Sri Lanka 15

26 In 2010, the running cost ratio, which reflects the interest cost incurred in a given year against the debt stock held at the beginning of the year, of Treasury bills and Rupee loans had decreased while running cost ratio of Treasury bonds increased compared to A significant decrease in the running cost ratio of Treasury bills was observed, as a large share of the Treasury bill stock was re-issued at a lower yield during the year. Meanwhile, the running cost ratio of Treasury bonds increased from per cent in 2009 to per cent in 2010, reflecting the impact of higher coupon rates of Treasury bonds issued before 2010 and higher discount rates for Treasury bonds which matured in Per cent CHART 15 INTEREST RATES OF TREASURY BILLS Jan-2010 The interest cost of domestic borrowings in 2010 decreased substantially compared to 2008 and Accordingly, the weighted average yield on Treasury bills issued in 2010 decreased to 8.32 per cent compared to per cent in The weighted average yield on Treasury bonds issued in 2010 decreased to 9.45 per cent compared to per cent in TABLE 13 Jan-2010 Feb-2010 Mar-2010 Apr-2010 May-2010 weighted average interest Cost of Domestic Borrowing (a) Jun-2010 Per cent Instrument Treasury bills Treasury bonds Rupee loans (b) Source: Central Bank of Sri Lanka (a) Weighted average interest cost = (amount issued*yield)/total Amount issued (b) No new Rupee loans were issued in 2008 and 2010 Jul-2010 Aug-2010 Sep-2010 Oct-2010 Nov-2010 Dec Days 182 Days 364 Days Interest Cost of Foreign Debt Interest payments on external debt in 2010 amounted to Rs. 55 billion, recording an increase of Rs. 19 billion (53 per cent) over that in This was mainly due to the increase in loan flotation expenses (Rs. 6.1 billion) on several new bi-lateral debt obligations, increase in interest payments on Treasury bills and Treasury bonds held by foreign investors, interest payment on the international sovereign bonds issued in 2009, and increase of non-concessional borrowings from external sources. Accordingly, the running cost ratio of foreign debt increased to 3.1 per cent in 2010 compared to 2.5 per cent in Debt Service Obligations Consequent to long-term foreign concessional borrowings, the existing debt liabilities of the government at end 2010 spanned up to In the domestic market, the existing debt service obligations were up to 2023, with the issuance of a Treasury bond in 2003 with an original maturity of 20 years, and Rupee loans issued in 1993 with a maturity of 30 years. A large portion of external debt outstanding at end 2010 was in the long-term category. Rs. billion CHART 16 DOMESTIC CURRENCY DEBT SERVICE OBLIGATIONS 1,200 1, Repayment Interest Total Owing to the international sovereign bond issues in 2007 and 2009, amounting to US Dollars 500 million each and US Dollars 1,000 million issue in 2010, government s external debt repayments will increase substantially in the years 2012, 2015 and Public Debt Management in Sri Lanka

27 Rs. billion CHART 17 EXTERNAL DEBT SERVICE OBLIGATIONS a Repayment Interest Total a Excluding debt service obligations to non-resident investments in Treasury bills and Treasury bonds Total Debt Service Cost Total debt service payments made in 2010 amounted to Rs. 820 billion, recording a decrease of Rs. 8 billion compared to This was due to the reduction in debt repayments in Total debt repaid in 2010 was Rs. 468 billion compared to Rs. 518 billion in This was due to the reduction in syndicated loan repayments and also differed defence loan repayments in 2010 compared to In 2009, syndicated loans amounting to US Dollars 225 million were repaid compared to US Dollars 25 million repaid in Out of the total debt serviced, Rs. 353 billion (43 per cent) was for the payment of interest cost while the amortization payments were Rs. 468 billion (57 per cent). Total domestic debt serviced in 2010 amounted to Rs. 687 billion while the foreign debt serviced amounted to Rs. 133 billion. The total debt service payments as a percentage of government revenue was 100 per cent in 2010, showing a significant improvement in 2010 compared to 118 per cent in This was mainly due to the higher revenue growth of the government and lower debt service payments in Public Debt Management in Sri Lanka 17

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29 4. Market Operations in 2010 Overview Conditions in the domestic financial system were significantly favorable in 2010, with the improvement of the security situation as the prolonged conflict ended in May 2009 and political stability brought about by the government by comfortably winning the Presidential and Parliamentary elections held in January and April 2010, respectively. With a positive outlook of low inflation, the CBSL relaxed its monetary policy stance to further stimulate the economy by reducing the policy rates, i.e., Repo Rate from 7.50 per cent to 7.25 per cent and Reverse Repo Rate from 9.75 per cent to 9.00 per cent during The favourable developments in the market brought down the interest rates and increased the demand for private sector credit. Improved market confidence arising from the positive outlook on low inflation and benign macroeconomic condition helped yield rates on government securities in both long and short-term maturities to decline in The improvement in foreign investor confidence brought about consequent to the country returning to normal, and the upgrade of the sovereign rating helped Sri Lanka to successfully conclude its third international sovereign bond issue. Primary Market Operations PDD continued to conduct primary market operations of issuing government securities to meet the government funding requirement as per the Budget The main instruments used for this purpose were the Treasury bills and Treasury bonds. In the Treasury bill programme, PDD issued Public Debt Management in Sri Lanka Treasury bills to the value of Rs. 1,000 billion, in face value, during Of this total, Treasury bills of Rs. 910 billion were issued in place of maturing Treasury bills, while Treasury bills of Rs. 90 billion were new issues. PDD conducted 53 Treasury bill auctions during the year. The CBSL s acquisition of Treasury bills mainly for reserve and liquidity management purposes in 2010 amounted to Rs. 134 billion. However, during the year, PDD was able to retire CBSL s Treasury bill holdings of Rs. 104 billion with the funds mobilized from the market and proceeds of the third international sovereign bond. During 2010, government borrowing through short-term instruments (Treasury bills), mainly through 182-day and 364-day Treasury bills increased while borrowing through 91-day Treasury bills decreased. This resulted in the average time to maturity of the Treasury bill portfolio increasing to 0.43 year at end 2010 from 0.40 year at end Total funds mobilized through the Treasury bond programme in 2010 amounted to Rs. 509 billion. PDD conducted 39 auctions during the year. Funds raised through the Treasury bond programme decreased compared to Further, the issuance of Treasury bonds with shorter maturities increased, resulting in a decrease in average time to maturity of the Treasury bond portfolio to 2.41 years from 2.48 years in During the year, 10 new bond series with maturities ranging from 2 10 years were issued strengthening the benchmark yield curve. The balance issuance was by reopening of the existing bond series and the selection of those series for reopening was carefully made considering market conditions, 19

30 investor preference, and the need to manage the maturity structure of the debt portfolio to mitigate refinance risk. TABLE 14 Primary Issue Details (a) Rs. billion Treasury bills ,000 Auction CBSL purchases Placements Treasury bonds Auction Placements (a) Face value Source: Central Bank of Sri Lanka Foreign investments in Sri Lanka rupee denominated Treasury bills and Treasury bonds continued in 2010 and it led to a significant inflow of funds to the domestic market. Favourable interest rate differentials, stability in exchange rate, and overall improvements in the domestic financial market conditions resulted in this steady inflow of funds into the government securities market. These inflows helped stabilize the interest rates in the domestic market and assisted to ease the pressure in the government borrowing programme. Treasury bill and Treasury bond holdings of foreign investors increased to Rs billion and Rs billion, respectively, at end 2010 from Rs billion and Rs billion respectively, at end There was some volatility in the yield rates during the first four months of Beginning May 2010, this trend reversed with stability in the political front, modest inflation, excess liquidity and increased investor confidence. The movement in the yield structure was in line with the monetary policy stance of the CBSL. In the primary market, Treasury bills of all three maturities declined by a range of 49 bps to 178 bps, while the rates of longer maturity bonds declined by around 99 bps to 156 bps during the year. Also, the positive market conditions facilitated the issuance of bonds with longer maturities. The yield rates on 2 10 year Treasury bonds declined from the range of 9.55 per cent to per cent across the yield curve by end 2009 to a single digit range of 8.15 per cent to 9.30 per cent by end Bond (SLDBs) auctions during 2010 with a view to rolling over the maturing SLDBs. The total funds mobilized through SLDBs amounted to US Dollars 628 million. These funds were raised with a maturity of two and three years at rates of six months LIBOR plus a weighted average margin ranging from 350 bps and 395 bps respectively. With improved investor confidence, the demand for SLDBs increased, enabling PDD to mobilize funds at an attractive rate with minimum rollover risk. TABLE 15 SLDBs ISSUED DURING 2010 Date of Issue Amount Accepted (USD million) Period (Years) Weighted Average Margin (%) 26/03/ /06/ /07/ /09/ Secondary Market Operations Source: Central Bank of Sri Lanka Increased trading in the government securities market was seen by the significant improvement in the turnover ratio in The turnover ratio of government securities in the secondary market increased to 22.5 times in 2010 from 16.1 times in This implies that the entire stock of securities had, on average, been traded 22.5 times in the secondary market during the year. A high volume of repo transactions was observed in both Treasury bill and Treasury bond markets while a marginal Rs. billion CHART 18 SECONDARY MARKET TRANSACTIONS RECORDED IN THE LANKASECURE 40,000 30,000 20,000 10, T-bill Out Right T-bill Repo T-bond Out Right T-bond Repo Total PDD conducted three Sri Lanka Development 20 Public Debt Management in Sri Lanka

31 increase in outright transactions in Treasury bills and Treasury bonds were observed in the secondary market. The trading operations in the Treasury bill market were significantly higher compared to that in the Treasury bond market. Secondary market trading volumes in Treasury bills and Treasury bonds increased by 166 per cent and 59 per cent, respectively, compared to the position in Secondary Market Yield Rates Secondary market yield rates on government securities recorded a declining trend shifting the yield curve downwards from 37 bps to 268 bps across the yield curve. This trend was a reflection Per cent CHART 19 SECONDARY MARKET YIELD CURVE Days 182 Days 364 Days 2 Yrs 3 Yrs 4 Yrs 5 Yrs 6 Yrs 8 Yrs 10 Yrs End Dec 09 End June 10 End Dec 10 of positive investor sentiment based on modest inflation expectations and overall positive economic outlook. Public Debt Management in Sri Lanka 21

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33 5. Public Debt Management in 2011 and Beyond Overview Public Debt Management Policies for 2011 and beyond has been drawn in-line with the overall public debt management objectives of raising funds at the lowest possible cost while maintaining risks of the debt portfolio at prudent levels and maintaining debt dynamics to achieve and foster medium-term sovereign rating targets. These objectives are expected to be achieved by pursuing an issuance policy based on market conditions aiming to issue medium to longterm Treasury bonds of benchmark securities, maintaining database and operating systems properly and efficiently, servicing debt obligations timely and accurately and developing a liquid and efficient debt securities market. Accordingly, the role of PDD in public debt management includes the following major activities: Introduce a comprehensive mobilization approach to ensure downward trend in the cost of servicing public debt; Conduct awareness programmes to broaden the investor base; Strengthen the risk management framework to maintain risks of the debt portfolio at prudent levels; Ensure the stability and credible operations of the PD system by strengthening the regulatory framework and close supervision; Extend the maturity structure of the debt portfolio to mitigate refinancing risk; Continue issuing benchmark securities and develop a long-term benchmark yield curve; Ensure the safety of investors in the government securities market; Make available a transparent and an accountable public debt management system; and Establish a mechanism to have a growing buffer fund to facilitate debt management functions. The above activities would be carried out in order to maintain public debt at a sustainable level while mobilizing funds to meet the government financing requirements and enhancing the efficiency of the government securities market. With emerging issues both in the domestic and international markets, diversification of the resource base is important to maintain stability of the domestic debt market, while meeting the government s cash-flow requirements at the lowest possible cost with a prudent level of risk. In addition, the medium to long-term fiscal strategy needs to be structured to lower debt financing of the public investment programme in line with the consolidation of overall macroeconomic developments in the country. Debt Management Strategy Debt management strategy has been drawn up to achieve the medium-term debt management targets stated in the CBSL s Road Map. Accordingly, the strategy intends to achieve the following objectives: Manage the public debt to ensure that the government s financial needs are met at the lowest possible cost, consistent with a prudent level of risk; Retire high cost, non-tradable debt instruments Public Debt Management in Sri Lanka 23

34 and replace with low cost, tradable and longerterm debt instruments; Ensure that the government debt is serviced on time with 100 per cent accuracy, preserving the default free status of the government; Broaden and deepen the government securities market; Implement risk management techniques and scenario models to operationalize the debt management strategy towards achieving medium-term targets; Further diversify the PD system and strengthen the regulatory framework; Establish a benchmark yield curve by issuing selected benchmark bond series; Expand the benchmark yield curve beyond 10 years and improve the secondary market operations by introducing an e-trading system; Amend the existing laws and regulation (LTBO and RSSO) to overcome the shortcomings in the government securities market; and Enhance participation of financial intermediaries in the government securities market. Medium-Term Debt Management Targets The targets for public debt management, which were set out in the CBSL s Strategic Plan for 2010 and stated in the Road Map: Monetary and Financial TABLE 16 MEDIUM-TERM DEBT MANAGEMENT TARGETS Indicator 2010 (a) 2015 Debt/GDP 81.9% 64% Foreign Currency Debt/Total Debt 43.1% 30% Interest Cost/Revenue 43.1% 20% Short-term Domestic Currency Debt/Total Domestic Currency Debt Average Time to Maturity of Domestic Currency Debt (yrs) Average Time to Refixing of Domestic Currency Debt (yrs) (a) Provisional 25.9% 15% Source: Central Bank of Sri Lanka Sector Policies for 2011 and Beyond projects a progressive reduction in the overall budget deficit in the medium-term. This progressive reduction in the budget deficit will bring a reduction in the net issuance, thereby reducing the Debt/GDP ratio to 64 per cent by end Government Borrowing Requirement in 2011 According to the Budget 2011, the total gross borrowing limit of the government for 2011, in terms of book value, amounts to Rs billion. Of this total, Rs billion is expected to be raised from foreign sources and Rs billion from domestic sources. TABLE 17 Government Gross Borrowing Requirement 2011 Item Total revenue (receipts) 989 Total expenditure (payments) 1,986 Borrowing limit approved for Jan-Dec 2011 by Parliament Rs. billion 997 Borrowing requirement 997 o/w Foreign 249 Domestic 748 Total debt repayments 528 o/w Foreign 99 o/w Rupee denominated payment 10 Domestic 453 o/w Dollar denominated payment 56 Source: Ministry of Finance and Planning Based on the government revenue estimates for 2011, the leeway available for the government to borrow through CBSL provisional advances amounts to Rs. 15 billion. Thus, the remaining Rs billion needs to be raised through the domestic borrowing programme. The total net borrowing requirement of the Budget 2011 amounts to Rs billion. Of this total, Rs billion is expected to be raised from domestic sources and the balance Rs billion from external concessionary and commercial sources. The resource availability in the non-bank domestic rupee sources for budgetary financing on a net basis is estimated to be Rs. 248 billion in 2011, while the balance funding requirement of Rs. 39 billion is expected to be mobilized from the banking system. The external commercial borrowing programme is 24 Public Debt Management in Sri Lanka

35 Box 2 Medium-Term Sovereign Rating Strategy for Sri Lanka Sovereign rating is the credit rating of a country indicating the composite risk level of the investing environment of that country. A sovereign rating gives potential investors an insight into the level of risk associated with debt securities issued by a particular country or a venture in such country before making such investment decision. Further, a favourable sovereign rating plays an important role in demonstrating the credit quality of the debt securities issuer in order to reduce the cost of raising funds. Also, a favourable sovereign rating attracts foreign direct investments (FDIs) to a country. A country/sovereign seeks ratings from credit rating agencies to provide financial transparency and demonstrate their credit standing in order to enhance investor confidence in investing in the country. At the request of a country/sovereign, a credit rating agency generally evaluates the country s economic, political, external, fiscal and monetary aspects based on the rating methodology of the respective rating agency to determine a fair representative credit rating. Fitch Ratings and Standard & Poor s (S&P) have been providing sovereign rating services to Sri Lanka since The government of Sri Lanka (GOSL) in 2010 decided to obtain a sovereign rating from Moody s Investors Service as well. The first sovereign ratings of the country were BBand B+ from Fitch Ratings and S&P respectively, in Both rating agencies had outlook of Stable regarding their rating of Sri Lanka at that time. Sri Lanka was assisted by J. P. Morgan in its capacity as the Rating Advisor to the GOSL in coordinating with the two rating agencies to facilitate the country s sovereign rating process. Under the extreme circumstances of the heightened internal conflict after 2005, the country experienced a down grading pressure in its rating by both rating agencies until mid 2009 (Table 2.1). With the end of the internal conflict in the mid 2009, the GOSL and the Central Bank of Sri Lanka (CBSL) determined to put the country s economic growth on a fast track. In view of the fact that obtaining a favourable sovereign rating was essential for an emerging economy like Sri Lanka to access funding in the international markets, and to attract FDIs to realise its macro-economic objectives, the GOSL instigated a forward looking and active medium-term sovereign rating strategy to upgrade the country s rating to position itself in the international capital market. The macroeconomic environment of the country turned into a conducive atmosphere for investments with the end of the 30-year internal conflict in the mid The Colombo Stock Exchange gained Table 2.1: Sovereign Rating History of Sri Lanka Year Standard & Poor s Fitch Ratings Moody s Rating Outlook Rating Outlook Rating Outlook 2005 B+ Stable BB- Stable 2006 B+ Negative BB- Negative 2007 B+ Stable 2008 B+ Negative B+ Stable B Stable 2009 B Negative B+ Negative B Stable B+ Stable B Positive 2010 B+ Stable B+ Positive B1 Stable Public Debt Management in Sri Lanka 25

36 momentum and the country entered into a new era of a promising future for investments. Investor confidence activated FDI inflows to the country. The peaceful environment also promoted growth of tourism channelling more funds into the country. The GOSL continued to develop infrastructure necessitated to promote economic activities country wide, with special plans to the conflict affected areas. Consequently, the country s sovereign rating was upgraded by both S&P and Fitch Ratings. Moody s Investors Service released its first rating as B1 with the outlook of Stable in conformity with the upgradings by the other two rating agencies. In order to further enhance the country s position in the international capital markets, the CBSL on behalf of the GOSL, adopted a new and a more proactive rating strategy by communicating directly with rating advisors and rating agencies rather than taking a passive approach in receiving the country s rating. As a result, a new sovereign rating strategy was formulated focussing all stakeholders into a dynamic, cooperative and forward looking path, realising that an effective sovereign rating strategy needs active participation of all stakeholders. The new strategy focused broadly on strengthening the awareness, capacity, and commitment of the main stakeholders of the rating process in developing a medium-term sovereign rating plan for the country. Accordingly, all stakeholders of the rating process are expected to actively involve in the country s sovereign rating strategy to upgrade its sovereign rating in the medium-term as depicted in Figure 2.1. In order to promote active participation of the stakeholders in the public and private sector of the country towards achieving the sovereign rating for the country as planned, a Sovereign Rating Committee (SRC) was appointed by the CBSL in May The SRC consists of representatives from the Ministry of Finance & Planning, the CBSL, trade chambers, professional bodies, and representatives from key private sector business areas covering exports, imports, manufacturing, tourism, etc. In order to facilitate operational aspects of the sovereign rating strategy, a Sovereign Rating Working Group (SRWG) was also appointed by the CBSL in January Identifying the important intermediary role that can be played by the rating advisors to improve the country s sovereign rating by co-ordinating the country s authorities and the rating agencies, the GOSL in July 2010, having evaluated the proposals received from international banks and investment houses, appointed The Hongkong and Shanghai Banking Corporation Ltd., Bank of America Merrill Lynch and The Royal Bank of Scotland Plc. as rating advisors for a period of four years from The rating advisors were expected to play an intermediary role between the country authorities and rating agency assigned to each of them. The main task of the SRC and SRWG is to conduct regular reviews on the developments in the country s economic, fiscal, monetary, external and political environment in order to communicate the improvements to the rating agencies through the rating advisors. To facilitate this information sharing and the review process, an annual rating calendar is prepared at the beginning of each year with the involvement of the major stakeholders of the sovereign rating process. Rating Figure 2.1: Medium Term Sovereign Rating Targets of Sri Lanka BBB- BB+ BB BB Year Table 2.2 Sovereign Rating Agencies and the Corresponding Rating Advisors Sovereign Rating Agency Sovereign Rating Advisor Standard & Poor s The Royal Bank of Scotland Plc. Fitch Ratings Limited The Hongkong and Shanghai Banking Corporation Ltd. Moody s Investors Service Bank of America Merrill Lynch 26 Public Debt Management in Sri Lanka

37 mainly targeted to mobilize funds by attracting non resident investors to GOSL debt securities. TABLE 18 Net Borrowing Requirement in 2011 Item Rs. billion Total net borrowing 431 Net foreign borrowing 144 Net domestic borrowing 287 Borrowing Strategy TABLE 19 Instrument Source: Ministry of Finance and Planning The borrowing strategy for 2011 has been formulated taking into account the two major objectives of public debt management, i.e., (i) raising funds for the government at the lowest possible cost and, (ii) maintaining risks of the public debt portfolio at a prudent level. The ability to raise funds at a reasonable cost depends on the existence of a dynamic market for which the prerequisites include a realistic interest rate policy, a competitive market and a smooth exit mechanism through the Government Gross Domestic Borrowing Programme in 2011 Rs. billion Book Value Treasury bonds 629 New Treasury bills 40 Rupee loans - SLDBs 64 OBU Loans - CBSL Advances 15 Total 748 Sources: Central Bank of Sri Lanka Ministry of Finance and Planning secondary market, together with availability of liquidity in the money market. The stability of the domestic market also largely depends on the ability to mobilize funds from external sources as announced in the Budget. In managing the debt portfolio, PDD aims to minimize debt servicing costs at an acceptable level of risk. It also seeks to maintain liquid bond series to facilitate the issuance of debt at acceptable cost and to manage the refinancing risk that arises when bond series mature. As a means to reduce the debt servicing cost and minimize the bunching issue of the debt, during 2011, PDD plans to retire expensive debt (Rupee loans) issued with calloption and issue new debt at lower interest rates and longer maturities. This strategy will also replace some of the non-tradable debt instruments with tradable instruments enabling the debt portfolio to be tradable in the secondary market. Maturity Pattern The maturity structure of outstanding government domestic debt at end 2010 showed that there is considerable bunching of debt obligations towards the shorter end. Accordingly, about 40 per cent of the existing domestic debt is estimated to be maturing in 2011, while about 44 per cent is estimated to be maturing within next 3 years ( ). Accordingly, more emphasis is needed to smoothen the maturity structure in the medium to long-term to reduce the rollover risk of the debt portfolio. TABLE 20 Maturity Profile of Government Domestic Debt (a) Rs. billion Instrument Total % of Total Maturity Year Treasury bills (b) Treasury bonds (c) Rupee loans SLDBs OBU Loans (d) Stock Beyond Total , , (a) Based on the existing debt stock as at end The CBSL advances and other non-instrument debt such as Source: Central Bank of Sri Lanka O/D, CIPC, Import bills are excluded. (b) Excludes Treasury bills held by non-residents (c) Excludes Treasury bonds held by non-residents & Rs. 4,397 million issued to CWE in 2003 (d) Includes US Dollars 4 mn loans obtained from NSB in 2007 and 2008 Public Debt Management in Sri Lanka 27

38 The debt management strategy planned for 2011 aims to issue medium to long-term debt in order to increase the maturity structure thereby smoothening the debt portfolio. The new issuance strategy for 2011 will introduce only limited new benchmark series with maturities of 2, 4, 6, and 10 years. Balance funding requirement will be mobilized by reopening the existing bond series, together with the efforts to improve secondary market transactions. This would improve liquidity in the debt market, reduce the borrowing cost to the government, lower the rollover risk, and reduce fragmentation in the bond market. 28 Public Debt Management in Sri Lanka

39 6. Risk Management in Public Debt and Sustainability of External Debt Management of Risk Management of risks in a financial portfolio is considered as an important tool to face any economic crisis successfully. Importance of having an effective risk management strategy was highlighted by the global economic crises, in particular, in the Asian financial crisis and in the crisis situation in 2008/2009. Analysis into history of portfolio risk management reveals that portfolio managers who paid adequate attention to managing risks in their portfolios have been successful to a greater extent in facing the economic crises. PDD of the CBSL manages the country s public debt portfolio, which consists of domestic and external debt. The public debt portfolio is the largest single debt portfolio in Sri Lanka. The main objective of the public debt management is to ensure that the financing needs of the government are met at the lowest possible cost with a prudent degree of risk. The risks associated with the public debt portfolio can be explained as the possibility of an unexpected variation in the level of debt service payments and/or inability to meet the debt service obligations when they fall due. When managing the public debt portfolio, PDD faces refinancing risk and market risks (interest rate risk and exchange rate risk) more often than other types of risk. Thus, PDD is responsible for mitigating such risks inherent in portfolio management by implementing effective debt management strategies to minimize the exposure to internal and external shocks. In perspective of risk management in the public debt portfolio, year 2010 can be considered as another challenging year in the aftermath of the global economic crisis. However, the post election political environment and the signs of recovery of foreign economies from the financial crisis were favourable to improve the risk indicators in the domestic and the external debt portfolio. Capitalizing the conducive economic environment in the latter part of 2010, a 10-year international sovereign bond of US Dollars 1,000 million was issued by the government and its proceeds were used to retire short-term costly debt. Types of Risks Refinancing Risk Refinancing or rollover risk is the risk associated with re-issue of existing debt at an unusually high cost or, in the extreme case, cannot be re-issued at all. Refinancing risk is usually assessed by averagetime-to-maturity (ATM) and the ratio of short-term debt to total debt. The ATM is the weighted average time to maturity of the debt. It decreased from 2.25 years at end 2009 to 2.10 years at end 2010 in the case of domestic currency debt due mainly to the investor preference for shorter to medium-term debt consequent to some uncertainties prevailed in the market during the first half of ATM for foreign currency debt also decreased marginally to 9.22 years at end 2010 from 9.26 years at end The overall ATM decreased marginally to 5.25 years at end 2010 from 5.29 years at end The ratio of short term debt to total outstanding debt, in the case of domestic currency, increased marginally to 26.4 per cent at end 2010 from 25.0 per cent at end Short-term foreign currency Public Debt Management in Sri Lanka 29

40 TABLE 21 Risk assessment Indicators Indicator Refinancing Risk Domestic Currency Debt Foreign Currency Debt Aggregate (a) (a) (a) Average Time to Maturity (ATM) (yrs) Short-term (original maturity less than or equal to one year) / Outstanding debt Interest Risk 25.0% 26.4% % 14.7% Duration (yrs) Average Time to Re-fixing (ATR) (yrs) Floating Rate debt / Outstanding debt 0.1% % 17.0% 7.2% 7.3% Foreign Exchange Risk Share of Foreign Currency Commercial debt / Official Reserves 50.7% 52.1% Share of Foreign Currency debt / Total debt 42.5% 43.1% Other Foreign Investments in Treasury bonds /Total Treasury bond stock 8.7% 10.0% Foreign Investments in Treasury bills /Total Treasury bill stock 8.4% 10.0% (a) Provisional Source: Central Bank of Sri Lanka debt was negligible compared to the total foreign currency loans outstanding at end The short term debt as a percentage of total outstanding debt also increased, although marginally, to 14.7 per cent at end 2010 compared to 14.4 per cent at end Interest Rate Risk Risk associated with volatility in market interest rates is called interest rate risk. Volatility in market interest rates affects the cost of debt servicing, when maturing debt is re-issued or interest rates are adjusted for floating rate debt. Interest rate risk in the debt portfolio is usually assessed using three indicators, namely, the duration of the debt stock, average-time-to-re-fixing (ATR) and the ratio of floating interest rate debt to total debt. Duration (expressed in years) of the debt stock is the weighted average term to maturity of the cash flows of the debt service payments, which measures the price volatility with respect to interest rates. It is a measurement of how long, in years, it takes for the price of a bond to be repaid by its cash flows. Duration of the overall public debt portfolio increased to 4.31 years at end 2010 from 4.20 years at end 2009 due to the increase in the duration of the foreign currency debt stock from 7.35 years at end 2009 to 7.55 years at end This was mainly due to long-term funding from multi-lateral and bi-lateral sources in addition to the issuance of the 10 year international sovereign bond. In contrast, the duration of domestic currency debt stock decreased marginally to 1.74 years at end 2010 from 1.77 years at end 2009, due to market appetite for short-term Treasury bonds. ATR of the debt portfolio measures the average time in which debt coupons are re-fixed. For zero coupon bonds or bonds with fixed coupons, ATR is the residual life of the bond. For floating rate bonds the ATR is the time left until fixing of the next coupon. ATR of the overall debt portfolio increased to 4.94 years at end 2010 from 4.80 years at end ATR of foreign currency debt portfolio increased to 8.55 years at end 2010 from 8.15 years at end 2009 due to more fixed coupon debt issuances including the international sovereign bond. ATR of domestic debt decreased to 2.21 years at end 2010 from 2.32 years at end 2009 due mainly to issuance of short-term Treasury bonds. Floating interest rate debt to total debt changed marginally to 7.3 per cent at end 2010 from 7.2 per 30 Public Debt Management in Sri Lanka

41 cent at end Floating rate foreign currency debt to total foreign currency debt increased marginally to 17.0 per cent at end 2010 from 16.8 per cent at end 2009, while floating rate debt was not available in the domestic currency portfolio at the end of the period under review, as the only remaining floating rate bond (index linked bond) matured in the first half of Index linked bonds amounting to Rs. 28 billion were first issued in 2006 with 3 and 4 year maturities. The coupon rate was linked to the Colombo Consumers Price Index (CCPI). Exchange Rate Risk Exchange rate risk is the risk that arises from the change in price of one currency against another. Exchange rate risk reflects the risk of volatility in debt service payments in terms of local currency due to the changes in cross currency exchange rates. It is usually assessed using the ratios of share of foreign currency commercial debt to official reserves and the share of foreign currency debt to total debt. Both indicators had a negative impact in the year 2010, increasing the exchange rate exposure of debt servicing. With the issuance of the international sovereign bond amounting to US Dollars 1,000 million in 2010, the outstanding foreign currency commercial debt increased by 26 per cent. Further, foreign currency debt stock also increased by 12 per cent in Accordingly, the share of foreign currency debt to total debt increased to 43.1 per cent at end 2010 from 42.5 per cent at end Further, the share of foreign currency commercial debt to official reserves increased to 52.1 per cent at end 2010 from 50.7 per cent at end Liquidity Risk The risk that a financial instrument cannot be traded quickly enough in the market to prevent a loss or make the required profit is called the liquidity risk. A liquid market facilitates the sales or purchases of large quantities of a debt instrument without significant movement in the price. Many measures were adopted by PDD to minimize the liquidity risk in the year To increase the liquidity in the domestic securities market, securities were Public Debt Management in Sri Lanka issued mainly with benchmark maturities of 2, 4, 6 and 10 years. To develop a liquid international bond market, investor awareness programmes were conducted in countries with a prospective investor base. Upgrading of the sovereign rating in 2010 also improved the confidence of the international investors in Sri Lankan government securities. Operational Risk The risk of loss, whether direct or indirect, arising from inadequate or failed internal processes, people or systems, or from external events, is called operational risk. It includes risks inherent in an institution s operating environment such as, fraud risk, settlement risk, legal risk, accounting risk, personnel risk, and reputation risk. Operational risk associated with the public debt portfolio has been minimized through several measures. Settlement risk has been minimized through the fully automated Scripless Securities Settlement System (SSSS) and Real-time Gross Settlement System (RTGS) to facilitate Delivery-versus-Payment (DVP), protecting both parties to a transaction. Internal controls have been put in place with segregation of duties, dual access control for auction systems, etc. A comprehensive Business Continuity Plan (BCP) has been developed along with a fully fledged Disaster Recovery Site (DRS), to support crucial public debt management activities in case of a contingency situation. BCP and DRS were made mandatory for every direct dealer in government securities and those were periodically tested. Sustainability of External Debt Debt sustainability can be defined as the ability of a debtor to service its debt in the medium and long-run without re-negotiating, defaulting or compromising its long-term goals and objectives. Maintaining the sustainability of external debt is vital for a sovereign debtor as the sovereigns have limited options to settle financial obligations in foreign currencies. There are various indicators to determine the sustainable level of external debt. Each has its advantages and disadvantages, and there is no 31

42 Box 3: Appreciation of Japanese Yen caused Yen Loans excessively costly for Sri Lanka (Foreign Exchange Risk: A Case Study) The foreign exchange risk of a debt portfolio reflects the risk of volatility in debt service payments in terms of local currency, due to changes in cross currency exchange rates. Appreciation of the loan currency (foreign currency) during the tenor of a loan, where loan repayments and interest payments are to be made in the loan currency, leads to increase debt service payments in domestic currency substantially and in turn to increase the effective interest cost of the loan. This has been a conspicuous case in respect of the Japanese Yen loans taken by the Government of Sri Lanka, which were considered concessional at the time of origination of loans. This article explains this case and stresses the need for having special institutional measures, to address the issue. Sri Lanka initiated obtaining Yen loans in 1968 and the first loan was disbursed in During the period up to end 2010, loan contracts totalling to 123 had been entered and about Yen 586 billion had been disbursed. Repayment of principal of loans commenced in 1975 and total repayments of principal during the period from 1975 to end 2010 amounted to Yen 241 billion as shown in Chart 3.1. As at end 2010, 115 JPY loans were at outstanding stock amounting to JPY 373 billion to be service over nest 40 years. General Terms of Yen Loans Loan Currency : Japanese Yen Grace Period : 5 10 years Repayment Period : years Grant Element : percent Interest Rates : Fixed and generally between 2-3 per cent Repayments/Interest Payments Currency : Japanese Yen yen million CHART 3.1 DISBURSEMENTS AND REPAYMENTS 35,000 30,000 25,000 20,000 15,000 10,000 5, Disbursements Repayments 1 Exchange Rate between Sri Lanka Rupee and Japanese Yen (SLR/Yen) from 1968 to 1975 was SLR 0.02 per Yen. 32 Public Debt Management in Sri Lanka

43 Appreciation of Japanese Yen and its Impact As shown in Chart 3.2, Japanese Yen appreciated substantially over the years due to various developments globally and domestically in the Japanese economy. Consequently, Sri Lanka Rupee (LKR) against Japanese Yen (JPY) experienced a sharp depreciation. CHART 3.2 EXCHANGE RATE MOVEMENT USD/Yen (LHS) SLR/Yen (RHS) The exchange rate between two currencies increased from SLR 0.02 per JPY in 1975 to SLR 1.29 per JPY in 2010 recording an average depreciation of about 10 percent each year (Chart 3.3).In comparison, an average depreciation of SLR against US dollar was 7 per cent during the period. CHART 3.3 ANNUAL % CHANGE OF YEN AND USD VS SLR Per cent % Change Yen % Change USD The sharp appreciation of Japanese Yen against Sri Lanka Rupee caused substantial impact on the servicing of Yen loans by the Government of Sri Lanka. As the principal payments and interest payments had to be done in Yen while loan disbursements were mainly in non-cash means, high exchange risk had to be absorbed by the government. This is more clearly explained by the following example. Public Debt Management in Sri Lanka 33

44 Example: A hypothetical loan disbursed in January 1983 with the following characteristics Agreement date : 01 January, 1983 Tenor : 30 years with Grace Period of 10 years Loan Amount : JPY 1,000 million (Rs. 100 SLRs 0.10 per JPY) Interest rate : 2.75 % As the repayments had to be done in Yen, the Rupee cost of each debt payment increased in proportions to the depreciation of Rupee against Yen. The Rupee costs of the debt payments under a scenario of stable exchange rate (SLR 0.10 per JPY) and under the variable exchange rates are depicted in Chart 3.4. CHART 3.4 CASE 1 : DEBT SERVICE PAYMENTS UNDER STABLE EXCHANGE RATE VS PREVAILING EXCHANGE RATE Rs. million SLRs (at stable Exchange Rate) Rupee prevailing ex rates As shown in Table 3.1, the total of debt payments during 30 year period under a scenario of stable exchange rate amount to Rs.155 million. However, in practical situation the exchange rate between SLR and Yen depreciated by above 10 percent each year and consequently actual cost of debt payments in Rupees amounts to Rs.1,095 million. Against the Yen loan of approximately Rs million taken in 1983 at 2.75 per cent the effective cost of borrowing in this case is 15.5 per cent. Table 3.1 Yen Yen Loan Rupee equivalent at stable ex. rate Rupee Equivalent under variable exchange rate If the same amount of loan is taken in USD USD Rupee Equivalent under variable exchange rate Disbursements 1,000,000, ,000, ,000,000 4,249, ,000,000 Total Payments 1,288,750, ,913,367 1,095,143,541 6,645, ,564,906 Effective Rate 15.50% 10.00% Accordingly, the appreciation Japanese Yen against Rupee has the following negative implications in respect of public debt management. 34 Public Debt Management in Sri Lanka

45 (a) Excessive increase in effective interest rates of Yen loans in terms of domestic currency. If a Japanese Yen loan was disbursed in January1983 with a 30 year maturity and 10 year grace period at the interest rate of 2.75 per cent, the effective interest rate of the loan would be 15.5 percent. The effective cost of the same loan if it was disbursed in US Dollars, would be only 10 per cent. (b) Budgetary implications As the government has to incur rupee cost of the debt servicing of Yen loans, annual budgetary costs increase and it results in increase in gross budget deficit and debt financing requirement for each year. In addition, this leads to increase in debt volume annually. (c) Impact on Debt Indicators due to increase in Rupee value of external debt/yen debt In 2010 alone, the Rupee value of Yen denominated loans increased by about Rs. 44 billion affecting debt indicators adversely. (Debt to GDP ratio increased by about 0.8% due to this fact). (d) Impact on public debt management function The Yen loan facilities that were considered concessional at the time of contracting has been excessively costly during the tenor of those facilities. This has created difficulties in evaluation funding sources and credibility of such evaluations. Further, the forecasting of debt service payments and making budgetary provisions accordingly had been a difficult task. Furthermore, the appreciation of Yen against Rupee adversely affects plans to achieve periodic targets of the medium term debt management targets. Options available to address the issue As per the market forecasts and forward exchange rates, the Japanese Yen is expected to further appreciate against other foreign currencies in future. Therefore, the debt service cost and the exchange risk associated with the Japanese Yen denominated loans would increase further, aggravating the issues relating to debt servicing. In this context, it is required to adopt effective debt management strategies in order to mitigate the risks involved in servicing Yen denominated debt stock. In that context, the following strategies could be considered. (a) Strategy 1 Discourage future borrowing in Yen (b) Strategy 2 Asset / Liability management (building sufficient Yen reserve at the Central Bank of Sri Lanka in order to meet periodic debt obligations) (c) Strategy 3 Implement currency SWAPS on Yen /US Dollar or Yen/SL Rupees (d) Strategy 4 Retire of a part of Yen Loans prematurely The above strategies need to be evaluated carefully taking into account costs and risks associated with such option, and the most cost efficient strategy or a combination of strategies beneficial for the borrower could be adopted. Need for a Global Measure: As loan currency appreciation is beyond the control of the debtor countries, it would be appropriate that multinational financial institutions such as World Bank or regional banks such as Asian Development Bank to adopt mechanisms to address adverse impact of continuous appreciation of certain loan currencies on the debtor countries. Such a mechanism may include inter alia, the provision of financial facilities to member countries to settle outstanding obligations on the debt that are in rapidly appreciating currencies. Public Debt Management in Sri Lanka 35

46 unanimity on adopting a sole indicator. These indicators are primarily in the nature of ratios, i.e., comparison between two relevant variables, and facilitate the policy makers in their external debt management exercise. The sustainability of external debt is measured here using five groups of indicators, namely, liquidity monitoring indicators, debt burden indicators, debt structure indicators, net present value (NPV) indicators, and dynamic indicators. The external debt indicators discussed in this review are mainly based on the proportion of receipts in exports of goods and non-factor services including workers remittances and compensation of employees (XGS) that is absorbed for servicing of external debt. Liquidity Monitoring Indicators The capacity of a country to settle its liabilities as they fall due is measured by liquidity monitoring TABLE 22 External Debt Sustainability Indicators (a) indicators. Interest service ratio, medium and longterm debt service ratio, total debt service ratio and short-term debt ratio are the four main ratios used for this purpose. The interest service ratio (INT/XGS) measures the cost of external debt as a percentage of XGS, where INT represents external interest payments. The value of the ratio increased significantly to 3.3 per cent in 2010 from 2.5 per cent in 2009 due mainly to the increased interest payments for foreign investments in government securities. In 2010, interest payments totaling to Rs billion were paid to foreign investors in government securities compared to Rs. 4.0 billion paid in The medium to long-term debt service ratio (MLDS/ XGS) and the total debt service ratio (TDS/XGS) decreased respectively to 7.7 per cent and 7.9 per cent in 2010 from 10.5 per cent and 10.6 per cent respectively, in This was mainly due to the reduction in external capital payments to Rs Per cent Description (b) Liquidity Monitoring Indicators (c) Interest Service Ratio (INT/XGS) Medium & Long-term Debt Service Ratio (MLDS/XGS) Total Debt Service Ratio (TDS/XGS) Short-term Debt Ratio (Short-term Debt/XGS) Debt Burden Indicators DOD/GNP DOD/XGS Debt Structure Indicators Rollover Ratio (Principal Payments/ Disbursements) (c) Short-term Debt / Total DOD NPV Indicators (d) NPV of Debt Service/GNP NPV of Debt Service/XGS Dynamic Indicators (c) Avg. rate of Interest/rate of growth of export 24.4 (37.3) 9.1 Avg. rate of Interest/rate of growth of GNP (a) Based on central government debt (b) Provisional (c) Including Treasury bill & Treasury bond payments to non-residents (d) NPV calculation is based on UN-ESCAP definitions and methodology Source: Central Bank of Sri Lanka Note: DOD represents total disbursed external debt outstanding, GNP: gross national product, XGS: exports of goods and non factor services including workers remittances and compensation of employees, TDS: total external debt service payments, INT: external interest payments, MLDS: external medium and long-term debt service payments and NPV represents the present value of the stream of future debt payments on foreign debt, discounted at CIRR. 36 Public Debt Management in Sri Lanka

47 billion in 2010 from Rs billion in Short-term debt ratio (Short-term debt/xgs) increased to 2.4 per cent at end 2010 from 0.4 per cent at end 2009 due to increase in foreign investments in Treasury bills. Debt Burden Indicators Debt burden indicators measure the level of the burden of external debt on the country s economy. For this purpose, two aggregate ratios are used comparing total outstanding external debt (DOD) with GNP and XGS. Both these indicators performed favorably in 2010, as GNP and XGS increased substantially, in nominal terms, by 15.7 per cent and 18.9 per cent respectively, at end 2010 compared to The DOD/GNP ratio and DOD/ XGS ratio were 36.6 per cent and per cent at end 2010 compared to 36.8 per cent and per cent respectively, at end Debt Structure Indicators Debt structure indicators measure the risk exposure of a country resulting from its external debt portfolio. The rollover ratio, which is the ratio of principal payments to disbursements, measures the ability of a country to meet its debt service payments using external disbursements. This ratio recorded a healthy 23.8 per cent in 2010 compared to 32.2 per cent in 2009, due to both increase in disbursements and decrease in repayments in external debt. The short-term debt to total debt ratio increased to 2.8 per cent at end 2010 from 2.3 per cent at end 2009 due to the increase in the Treasury bill holdings by foreigners. Net Present Value Indicators Two commonly used Net Present Value (NPV) indicators, NPV of debt service to GNP and NPV of debt service to XGS, compare the current cost of future debt service obligations to the overall level of economic activity and to the capacity of the country to generate foreign exchange receipts. Both NPV indicators, NPV/GNP ratio and NPV/ XGS ratio, impacted negatively in the period under review, recording 36.9 per cent, and per cent, respectively, from 36.3 per cent and per cent, Public Debt Management in Sri Lanka at end This was mainly due to 18 per cent increase in NPV of debt service payments at end 2010 compared to the previous year. Dynamic Indicators The dynamic indicators compare the growth in cost of borrowing with growth in exports and growth in the economy. The ratio of the average interest rate of the debt portfolio to the rate of export growth recorded 9.1 per cent in 2010 compared to the negative figure (-37.3 per cent) recorded in 2009, mainly due to the growth in exports in The ratio of average interest rate to the rate of GNP growth indicated an improvement, recording 24.1 per cent in 2010, mainly due to the elevated GNP growth in 2010 compared to Overall Debt Sustainability Overall debt sustainability can be broadly assessed using two aggregate indicators, namely, overall debt to GDP ratio and share of foreign debt service payments to official reserves. The total debt to GDP ratio decreased to 81.9 per cent at end 2010 from 86.2 per cent at end Further, a significant decrease in the share of foreign debt service payments to official reserves was evidenced in 2010 recording TABLE 23 Overall Debt SustainaBILITY Per cent Indicator (a) Debt/GDP Share of foreign debt service payments /Official reserves (b) Source: Central Bank of Sri Lanka (a) Provisional (b) Official reserves at end of the previous year 21.8 per cent, compared to 55.4 per cent in This was due to the increase in official reserves in 2009 as well as a decrease in total external debt service payments in 2010, compared to Comparing the debt sustainability indicators with their critical values, Sri Lanka can be classified as a less indebted country. Further, Sri Lanka was able to face the global economic crisis in 2008/2009 without having a significant impact on its debt portfolio, owing to prudent management of its public debt. 37

48 Box 4 Critical Values of Debt Sustainability Indicators To assess debt sustainability, the debt indicators are compared with the indicative debt burden thresholds for corresponding debt indicators. A set of commonly used vulnerability thresholds, published by the United Nations Economic and Social Commission for Asia and the Pacific (UN- ESCAP), is given below. This set of critical values is based on the World Bank s long-term monitoring of developing countries ability to service their external obligations. However, if indebtedness criteria are close to the stated limits the outcome should be interpreted with caution. Indicator Highly Indebted Moderately Indebted Less Indebted Sri Lanka 2010 DOD/GNI >50% >30% and < 50% <30% 36.6 DOD/XGS >275% >165% and <275% <165% TDS/XGS >30% >18% and <30% <18% 7.9 INT/XGS >20% >12% and <20% <12% 3.3 NPV/GNI >80% >48% and <80% <48% 36.9 NPV/XGS >220% >132% and <220% <132% Source: Manual on Effective Debt Management, UN-ESCAP, Central Bank of Sri Lanka Note: DOD represents total disbursed external debt outstanding; GNI: gross national income; XGS: exports of goods and non factor services including workers remittances and compensation of employees; TDS: total external debt service payments, INT: external interest payments and NPV represents net present value. In Sri Lankan case, apart from the DOD/GNI ratio, all the critical values of the debt sustainability indicators were substantially below the threshold levels. Accordingly, it can reasonably be concludedthat Sri Lanka is a less indebted country. 38 Public Debt Management in Sri Lanka

49 7. Performance of Primary Dealers Introduction The Primary Dealers (PDs), specialized intermediaries appointed by the Monetary Board of Central Bank of Sri Lanka to deal in government securities, have been operating as a dedicated system since year PD system in 2010 continued with 11 PDs consisting of 5 Licensed Commercial Banks and 6 specialized companies. Recognizing the high market risk exposure faced by PD industry being engaged in a limited product market, the PDs were permitted to diversify their activities within a given framework. Financial Performance PD industry performed financially well during 2010 with a continued downward shift in the yield rates on government securities in the latter part of the year. The key financial indicators showed enhanced results during the year while maintaining risk indicators within prudent levels. Capital Base The total capital base of the industry as at end 2010 stood at Rs. 13,417 million, recording a 34.7 per cent increase over the previous year. High net interest income and trading gains earned during the year mainly contributed to the increase in the capital base. However, the capital increase in 2010, when compared to the previous year, was low due to reduced profitability in The dividend payments by some PDs in 2010 utilizing high profits earned in 2009 also contributed to lower the capital accumulation. TABLE 24 Primary Dealer Performance Rs. million Financial Indicator (a) Total Assets 84,398 99, ,773 Trading Securities 45,483 54,015 95,423 Investment Securities 19,086 17,616 14,943 Reverse Repo 15,990 24,976 12,824 Other Assets 3,839 3,203 2,582 Equity and Liabilities 84,398 99, ,773 Total Capital 6,151 9,958 13,417 Repo 62,985 73,032 74,001 Other Liabilities 15,263 16,820 38,356 Total Income 11,960 18,398 15,534 Profit Before Tax 1,696 6,215 5,455 Risk Weighted Capital Adequacy (per cent) Repo/Assets Ratio (per cent) Capital Leveraging (times) Return on Equity (per cent) Return on Assets (per cent) No.of Loss Making PDs Gap Analysis (upto 7 Days) (9,489) (6,185) (15,791) Capital Erosion (per cent) ( 100 bps Increase in Int. Rate) Stress Test Secondary Market Transactions (6.2) (7.6) (9.3) 5,667,093 6,459,690 6,442,277 Treasury bills, total 2,862,312 1,923,834 2,148,506 Treasury bonds, total 2,804,781 4,535,856 4,293,771 (a) Provisional Source: Central Bank of Sri Lanka The Capital Adequacy Ratio (CAR) had remained at the same levels over the period of two years recording only a marginal increase from 22.4 per cent in 2009 to 22.6 per cent in Though the risk weighted assets, in particular, the trading Public Debt Management in Sri Lanka 39

50 portfolio, had increased, the corresponding capital levels too increased during the year. Accordingly, the CAR remained well above the minimum regulatory requirement of 8 per cent. Portfolio The total portfolio of PD industry stood at Rs. 123,191 million as at end 2010, showing an increase of 27.5 per cent compared to the position at end The total portfolio consisted of trading portfolio, investment portfolio, and the reverse repo portfolio. The increase in total portfolio can mainly be attributed to the significant increase in the trading portfolio. The trading portfolio had recorded a 76.7 per cent increase in 2010 over the previous year. Both the investment portfolio and the reverse repo portfolio had decreased by 15.2 per cent and 48.7 per cent, respectively. Profitability The downward shift in the yield curve, especially during the second half of 2010, enabled PDs to earn high income and profits, though lower as compared to PD industry had earned an income of Rs. 15,534 million in Nearly 85 per cent of the income had been earned through interest while the balance income had come from trading gains. In 2010, PD industry had recorded a net revaluation loss of Rs. 145 million. When compared to 2009, the total income had decreased by 15.6 per cent. The profit before tax of PD industry declined by 12.2 per cent to Rs. 5,455 million in 2010 from Rs. 6,215 million in the previous year. With the decline in profits, the profitability indicators such as Return on Equity (ROE) and Return on Assets (ROA) too had declined in 2010 to 35.4 per cent from 46.4 per cent and to 4.3 per cent from 6.2 per cent, respectively. Review of External Operating Environment The PDs were operating in a limited product market as a dedicated system, exposing themselves to a high market risk. Though PDs were allowed to diversify their activities, only one PD had attempted to diversify its business. The other PDs had not diversified their activities. Therefore, still the market risk remains the main risk faced by PDs. However, during 2010, the market risk remained low as revealed by the stress test on trading portfolio. The liquidity risk of the PDs also remained low during the year, with the improved liquidity situation in the market and due to high level of market activity. Stress Testing Stress testing is done to assess the sensitivity of each PD s trading portfolio for a change in the interest rates and its impact on the capital base and Risk Weighted Capital Adequacy Ratio (RWCAR) of the respective PD. The exposure of PDs to market risk was low in 2010, given the shorter duration of the trading portfolio of PDs. The modified duration of the trading portfolio was recorded at 1.29 years, a marginal decrease compared to the 1.4 years prevailed as at end The results of the stress test conducted as at end December 2010 revealed that a loss of Rs. 1,245 million on the trading portfolio and also on the capital base of PDs, would occur in the event of an increase in yield rates by 100 bps. The expected capital erosion for a 100 bps increase in market yield rates would be 9.3 per cent. As all PDs had been maintaining high capital levels, PD system had been resilient to the market risk during the year. As a result, the aggregate RWCAR after the stress test would only come down by 2.1 per cent. Gap Analysis In identifying the liquidity risk exposure of PDs, the maturity profile of their assets and liabilities was analyzed and monitored on a regular basis. The liquidity risk was assessed by the level of negative mismatch between the assets and liabilities, their maturity age, and the availability of alternative funding arrangements from different sources. The cumulative overnight negative mismatch reported by the PDs as at end 2010 was Rs. 5, Public Debt Management in Sri Lanka

51 million. It was a significant increase when compared to the negative maturity mismatch prevailed, for the same maturity period, at end 2009, which was Rs. 2,659 million. For the period up to one week, the cumulative mismatch had increased to Rs. 15,791 million from Rs. 6,185 million. On the contrary, the cumulative negative mismatch up to one month maturity had decreased from Rs. 26,305 million to Rs. 23,522 million at end 2010 compared to the position at end When taken as a percentage of the total portfolio of the PD industry, the cumulative negative mismatch accounted for overnight, up to one week, and up to one month maturity periods as 4.4 per cent, 13.5 per cent, and 20.1 per cent, respectively, indicating a low level of liquidity risk to the PD system as a whole. Primary and Secondary Market Participation of Primary Dealers The participation of PDs at primary auctions had declined in 2010 over 2009, except for the participation of bank PDs at Treasury bill auctions. Their participation at the secondary market had not changed significantly over the same period. Primary Market Participation The PDs have the privilege of participating at the primary auctions held by the CBSL for Treasury bills and Treasury bonds. During 2010, the bank primary dealer units had recorded the highest effective participation levels at both Treasury bill and Treasury bond auctions, recording 69.1 per cent and 31.5 per cent, respectively. In 2009, the effective participation by this group of PDs at Treasury bill auctions had been 60.9 per cent. In contrast, their participation at Treasury bond auctions had been more in 2009, at 41.2 per cent. The next highest effective participation at auctions had been by bank PD companies (i.e. PD companies which are subsidiaries of licensed banks). They had recorded 23.3 per cent participation level at Treasury bill auctions and 24.5 per cent at Treasury bond auctions. Their participation at Treasury bill and Treasury bond auctions had declined compared to The contribution of non-bank PDs (i.e. specialized PD companies which are not subsidiaries of licensed banks) had been low and had further declined during 2010 compared to In 2010, their effective participation at Treasury bill auctions was 7.6 per cent and the corresponding figure for 2009 was 12.6 per cent. Similarly, their effective participation at Treasury bond auctions in 2010 was 7.1 per cent compared to 17.5 per cent in Secondary Market Participation Secondary market transactions of PDs included outright sales and outright purchases, repurchase transactions and reverse repurchase transactions. Total secondary market transactions of PDs stood at Rs. 6,442.3 billion and had not changed significantly in 2010 over However, an increase in Treasury bill transactions by 11.6 per cent had been recorded in 2010 compared to The Treasury bond transactions of PDs in the secondary market had declined by 5.3 per cent over the same period. Total repurchase transactions had increased in 2010 by 5.8 per cent compared to Rs. billion CHART 20 SECONDARY MARKET TRANSACTIONS AS REPORTED BY PRIMARY DEALERS 7,000 6,000 5,000 4,000 3,000 2,000 1, T-bill Out Right T-bill Repo T-bond Out Right T-bond Repo Total Capacity Building in Debt Market With a view to further developing the government securities market in Sri Lanka, a capacity building process was carried out in 2010 targeting the PDs. Accordingly, a study tour was organized for the Chief Executive Officers of PDs to Australia in March 2010, in order to give them an exposure to the operations of a developed debt and capital market. The study tour included visits to a number Public Debt Management in Sri Lanka 41

52 of government agencies including the Reserve Bank of Australia, the Australian Office of Financial Management (the debt office), and the Australian Securities Exchange. They also visited the financial market association and certain market participants in the Australian debt and capital market. In May, 2010, a workshop was organized for the dealers and treasury personnel of PDs to give them a deeper understanding of the developments in the domestic economy and markets both domestic and international. 42 Public Debt Management in Sri Lanka

53 Box 5 - Statutory Requirements for Primary Dealers The legislative framework governing the Primary Dealers (PDs) in government securities in Sri Lanka consists of the following enactments, and rules, regulations and directions issued under those enactments. (a) The Monetary Law Act No. 58 of 1949 as amended (MLA) (b) The Local Treasury Bills Ordinance No. 8 of 1923 as amended (LTBO) (c) The Registered Stock and Securities Ordinance No. 7 of 1937 as amended (RSSO) (d) Regulations 1 issued under the LTBO and RSSO (e) Directions 1 issued under the LTBO and RSSO (f) System Rules 1 of the LankaSettle System, issued under the MLA. According to section 17 of LTBO and section 58 of RSSO, a primary dealer means any commercial bank, company or other person appointed by the Monetary Board as a primary dealer for the purpose of dealing with the Central Bank of Sri Lanka (CBSL) as a counterparty in the primary and secondary markets for Treasury bills and registered stock and securities, issued by the Government of Sri Lanka. PDs are appointed, regulated, supervised and monitored under the provisions of LTBO and RSSO. Furthermore, PDs are appointed as Dealer Direct Participants and Direct Participants under those two statutes. A Direct Participant is entitled to maintain securities accounts to hold Scripless Treasury bills and Treasury bonds to which such Direct Participant has title. A Dealer Direct Participant can maintain accounts in respect of its customers to hold Scripless Treasury bills and Treasury bonds in addition to maintaining accounts to hold Scripless Treasury bills and Treasury bonds which the Dealer Direct Participant has title. No person other than a Dealer Direct Participant may on behalf of any other person, transact in Scripless Treasury bills and Treasury bonds. Therefore, any person, other than a Direct Participant and the CBSL, desiring either to make a transfer or to take a transfer of Scripless Treasury bills or Treasury bonds, shall do so only through a Dealer Direct Participant. In terms of section 16 of LTBO and section 55 of RSSO, the Minister of Finance may make regulations for the purpose of giving effect to the provisions of each of those two statutes. The regulations may provide, inter-alia, for, the appointment of PDs and the conditions to be observed by, and the privileges entitled to, and the duties to be performed by the PDs; the appointment, regulation, supervision and monitoring of Direct Participants and Dealer Direct Participants; the issue, holding and administration of Scripless Treasury bills and Treasury bonds; the manner in which Treasury bills and Treasury bonds or interests therein may be purchased, sold, transferred, pledged or encumbered; and the procedures and conditions applicable to the primary issue of, and the subsequent transfers and other transactions relating to the Treasury bills and Treasury bonds. The following Regulations made by the Minister of Finance, are vital for the appointment of Primary Dealers and for the transactions involving the Scripless Treasury bills and Treasury bonds. 1 Regulations, directions and System Rules are available on the website of CBSL ( Public Debt Management in Sri Lanka 43

54 (a) The Local Treasury Bills (Primary Dealers) Regulations No. 01 of 2009 and Registered Stock and Securities (Primary Dealers) Regulations No 1 of These two Regulations, inter-alia, lay down the procedure applicable for the appointment, supervision, examination, evaluation of performance, suspension and cancellation of appointment, of Primary Dealers, the activities which may be carried out by the Primary Dealers and the variation in the capital of a Primary Dealer Company. (b) The Scripless Treasury Bills (Transactions) Regulations No. 2 of 2004 and Scripless Treasury Bonds (Transactions) Regulations No. 2 of Repurchase Transactions and Reverse Repurchase Transactions in Scripless Treasury bills and Treasury bonds may be effected only in accordance with these Regulations. According to these two sets of Regulations, Repurchase or Reverse Repurchase Transactions in Scripless Treasury bills and Treasury bonds shall be preceded by a written agreement. A number of Directions 2 have been issued to the PDs by the CBSL under the LTBO and RSSO imposing prudential requirements and to ensure the compliance of the Primary Dealers with the relevant prudential requirements and in turn their credible operations and stability of the PD system. The System Rules of the LankaSettle System 3 issued in terms of the Monetary Law Act as amended by the Monetary Law (Amendment) Act No. 22 of 2002, regulates the transactions and operations of the participants of the LankaSettle system. Primary Dealers being Participants of LankaSettle, are bound by the System Rules. Primary Dealers act as custodians for their customers in LankaSecure 4 and under this custodial responsibility Primary Dealers shall promptly and accurately record in LankaSecure the ownership or any change of ownership of securities of their customers. 2 A summary of the Directions is given in Special Appendix to this book. 3 LankaSettle System means the Sri Lanka Real Time Gross Settlement System and the LankaSecure System established in terms of the MLA. 4 LankaSecure means the Scripless Securities Settlement System (SSSS) and the Central Depository System (CDS) 44 Public Debt Management in Sri Lanka

55 Box 6 - Developments in LankaSettle and LankaSecure in 2010 Since the inception of the LankaSettle system which consists of the Real Time Gross Settlement System (RTGS) and the LankaSecure system in September , a significant progress has been made towards increasing efficiency and maintaining stability of the country s financial system, and the development of the secondary market trading in government securities. The Central Depository System of the LankaSecure system has facilitated maintaining of electronic records of the full life cycle of the government securities from the issue until the maturity, with its holdings recorded under each and every single beneficial owner in scripless form. Many new developments were incorporated into the LankaSettle and LankaSecure systems during the year 2010 with a view to improving their business functionality, efficiency, user friendliness and auditing capability, in order to support new business requirements, the rapid growth of government securities holdings and secondary market transactions. These developments were implemented in response to the feedback from the participating financial institutions of the LankaSettle and LankaSecure systems, beneficial owners of government securities and other stakeholders. The Financial Sector Assessment Programme, a joint initiative of the IMF and the World Bank which aims to increase the effectiveness of the efforts to promote the soundness of financial systems in their member countries, strongly recommended that the Central Bank of Sri Lanka (CBSL) should implement a participant managed Intraday Liquidity Facility (ILF) in the RTGS system. Accordingly, LankaSettle and LankaSecure systems introduced a mechanism which enabled the participating institutions to manage ILF at their discretion. This new facility enabled the treasurers of participating institutions to carryout multiple ILF requests and reversals within a business day as and when liquidity is required by their financial institutions to discharge their payment obligations to other participating financial institutions. This facility also introduced the flexibility of initiating ILF reversals on all pledged securities, part of all securities and part of a particular security, providing the treasurers with more control over their collateral securities and ILF funds, while at the same time enabling them to closely monitor their financial institution s ILF usage. The costs of SWIFT messaging, correspondence with the CBSL (for ILF requests and reversals) and other related administrative formalities involved in earlier ILF granting mechanism were considerably reduced with the implementation of the new participant managed ILF facility. Participating financial institutions and the beneficial owners were further benefited from the introduction of the auto-reversal facility for customer Repurchase (Repo) transactions into the LankaSecure system, in February Before introduction of this functionality, the LankaSecure system provided auto- reversal facility only for the inter-participant Repo transactions. Majority of LankaSecure Repo transactions comprises customer Repo transactions and this facility removed the costs of SWIFT messaging and other related administrative formalities involved in reversal of customer Repo transactions manually. Also, any negative impact of the participant institution s failure to manually reverse a customer Repo transaction on its maturity date was eliminated with the implementation of this auto-reversal facility for customer Repo transactions. The space available to record the beneficial owner s name in the CDS was increased to facilitate lengthy beneficial owner names, and the space to record address details was also expanded to facilitate full recording of a lengthy beneficial owner address. The full recording of beneficial owner details facilitated timely receipt of CDS holding and transaction statements through mail by the respective beneficial owners and the accurate classification of geographical dispersion of beneficial 1 LankaSecure system consisting of the Scripless Securities Settlement System (SSSS) and the Central Depository System (CDS) to hold government securities in scripless form, commenced in February Public Debt Management in Sri Lanka 45

56 owners recorded in the CDS. Facility to record full details of the beneficial owners also facilitated Know Your Customer (KYC) requirement of the participating financial institutions. LankaSecure system was also introduced with a facility to provide an audit trail on the beneficial owner creation and subsequent changes done to the beneficial owner details. This facility was expected to help the supervisory function of the participating financial institutions on any unauthorised recordings of beneficial owner details under its CDS accounts, and to fulfill any internal or external audit requirements. LankaSettle, LankaSecure and the CDS are expected to further expand their activities in the coming years to cater to the growing needs of the Sri Lankan financial and capital markets, while maintaining compliance with the international best practices and standards. 46 Public Debt Management in Sri Lanka

57 Special Appendix 1. Major Developments in the Government Securities Market in Sri Lanka Enactment of the Local Treasury Bills Ordinance (LTBO) enabling the Government to borrow through issue of Treasury bills Enactment of the Registered Stock and Securities Ordinance (RSSO) enabling the Government to borrow through issue of medium and long term government securities Commencement of Treasury bill issues under parliamentary approval Enactment of the Monetary Law Act (MLA) entrusting the Central Bank of Sri Lanka (CBSL) to act as the agent of the government in managing public debt Enactment of the Foreign Loans Act (FLA) - Enactment of the Tax Reserve Certificates Act (TRCA) Commencement of the issuance of six months (182 days) Treasury bills. Prior to 1981 only three months (91 days) Treasury bills were issued. - Introduction of secondary market operations for Treasury bills Enactment of the Loans (Special Provisions) Act Commencement of weekly issues of Treasury bills. Fortnightly issues of Treasury bills on the 1st and the 15th of the month had taken place before Introduction of tap system through the regional offices of the CBSL Issuance of Treasury bills with multiple maturities of 91days, 182 days and 364 days - Introduction of the Treasury Certificates of Deposit Act (TCDA) - Tap system extended through authorized agents Introduction of accredited PD system. Eleven PDs consisting of eight Licensed Commercial Banks (LCBs) and three non bank dealers were appointed Introduction of repurchase agreements on Treasury bills Reforming the PD system. Eighteen PDs consisting of thirteen LCBs and five non-bank dealers were appointed Phasing out of non- competitive bidding by public sector institutional investors - Introduction of reverse repurchase transactions on Treasury bills - Fixing and prior announcement of Treasury bills to be issued under each maturity - Amendment of LTBO and RSSO to facilitate the issue of scripless Treasury bills and treasury bonds and maintenance of the Central Depository System 47 Public Debt Management in Sri Lanka

58 Commencement of the issuance of Treasury bonds - Formation of the Association of Primary Dealers in June Introduction of an electronic bidding facility Introduction of the dedicated PD system, where only the dedicated companies were appointed as PDs Issuance of Sri Lanka Development Bonds (SLDBs) Expansion of PD system to licensed commercial banks Enactment of the Fiscal Management (Responsibility) Act - Introduction of a Code of Conduct for PDs - CBSL moved from a system of passive Open Market Operations (OMO) to an active OMO system in order to enhance the effectiveness and market orientation of monetary policy operations Conversion of Treasury bills and Treasury bonds issued in scrip form into scripless form pursuant to the Regulations issued under LTBO and RSSO in Introduction of Scripless Securities Settlement System and the Central Depository System for government securities - Issue of government securities in scripless form Issuance of first index-linked Treasury bonds - Issue of first sovereign credit rating of Sri Lanka by Standard and Poor s (S&P) and Fitch Ratings Introduction of the Risk Weighted Capital Adequacy framework for PDs - Opening up the Treasury bond market to foreign investors with the aggregate ceiling of 5% of the outstanding - Issue of Sri Lanka Nation Building Bonds (SLNBB) - Suspension of the participation of PDs in the CBSL s active OMOs Opening of retail outlets to sell government securities - Lifting the suspension of PDs participation in the CBSL s active OMOs - Enhancement of the aggregate ceiling of 5% to 10 % in respect of investment in Treasury bonds by foreign investors. - Issuance of the first International Sovereign Bond of US Dollars 500 million to international capital market Authorizing LCBs to invest in the International Sovereign Bond issued by the Government of Sri Lanka, in the secondary market - Opening up of the Treasury bill market to foreign investors with the aggregate ceiling of 10 % of the outstanding. - Introduction of the PC based payment and securities settlement system as part of the Business Continuity Plan of the LankaSettle System Issuance of the second International Sovereign Bond of US Dollars 500 million 48 Public Debt Management in Sri Lanka

59 - Opening up of Treasury bill and Treasury bond market to Sri Lankan Diaspora and Migrant workforce - Providing concessions in obtaining Dual Citizenship status by ex-sri Lankans (holding foreign citizenship) who invest in Sri Lanka government Treasury bonds subject to certain conditions. - Extending the yield curve on government securities up to 10 years - Increasing the maximum number of days accepted by the LankaSecure system for future value dated transactions from 31 calendar days to 364 calendar days - Upgrading the sovereign credit rating outlook by S&P and Fitch Ratings - Setting up of the Domestic Debt Management Committee (DDMC) by the Monetary Board on 05 November Introduction of participant managed Intraday Liquidity Facility (ILF) to the LankaSettle and LankaSecure Systems - Introduction of an Analytical Tool to develop a Medium-term Public Debt Management Strategy - Conducting a workshop for the dealers and treasury officials of PDs on the development of domestic and international economy - Issuance of the third International Sovereign Bond of US Dollars 1,000 million with 10 year maturity. - Issue of first sovereign credit rating of Sri Lanka by Moody s Investors Service and upgrading the sovereign credit rating of Sri Lanka by Fitch Ratings and S&P. Public Debt Management in Sri Lanka 49

60 2. Institutional Framework for Public Debt Management Institutional Process in Public Debt Management The Parliament determines the overall annual borrowing limit for each year through the Appropriation Act. Within the set borrowing limit, the Minister of Finance is authorised to make borrowings for the Government. The Public Debt Department (PDD) of the Central Bank of Sri Lanka (CBSL) is responsible for raising, servicing and managing the public debt, as the CBSL is the agent of the government in managing public debt in terms of MLA, and in terms of the provisions of RSSO and LTBO. In order to prepare the government borrowing programme and to ensure that the Treasury s cash flow requirements are met and borrowing limits are maintained, the Domestic Debt Management Committee (DDMC) 1 meets once a month. To ensure effective and efficient management of government debt and cash flow operations, the PDD works in close co-operation with the Treasury Operations Department of the Treasury. Figure 1: PUBLIC DEBT MANAGEMENT-INSTITUTIONS AND THEIR KEY RESPONSIBILITIES AND FUNCTIONS Parliament Central Bank Responsible for setting annual borrowing limit through the annual Appropriation Act Government Treasury Public Debt Department (PDD) Mobilisation of funds from domestic sources and external non concessionary commercial sources for government budget Issue government securities through auctions and on tap basis Servicing of public debt Maintenance of domestic debt database Maintenance of CDS Regulation and supervision of Primary Dealers (PDs) Developing the Government Securities market Dissemination of information Economic Research Department ERD) Analysis of debt statistics and conduct of debt sustainability and submit reports to the Monetary Board. External Resources Department (ExRD) Mobilisation and management of external concessionary funds Coordination with donors Maintenance of external debt database Treasury Operations Department (TOD) Treasury cash flow management Provision of funds for debt service Fiscal Policy Department (FPD) Advise on: Fixing of total borrowing limits Loan composition External commercial borrowings State Accounts Department (SAD) Accounting for fiscal operations. 1 The DDMC consists of the Superintendent of Public Debt (Chairman), Additional Superintendent of Public Debt (Secretary), Director of the Domestic Operations Dept., Director of the Economic Research Dept., Director of the Statistic Dept., Director of the State Accounts Dept. of the MOF. 50 Public Debt Management in Sri Lanka

61 Governance The regulatory framework governing the public debt operations in Sri Lanka consists of the following legislations, which have been amended from time to time to cater to the development sin the market. (a) The Local Treasury Bills Ordinance (LTBO) of 1923 as amended in 1953, 1992, 1995 and 2004 (b) The Registered Stock and Securities Ordinance (RSSO) of 1937 as amended in 1949, 1983, 1985, 1995 and 2004 (c) The Monetary Law Act (MLA) of 1949 as amended in 1954, 1963, 1965, 1967, 1968, 1969, 1971, 1974, 1977, 1978, 1979, 1980, 1985, 1988, 1995, 1998, 2002 and 2006 (d) The Foreign Loans Act (FLA) of 1957 as amended in 1962,1963,1980 and1984 (e) The Tax Reserve Certificates Act (TRCA) of 1957 as amended in 1961 and 1981 (f) The Loans (Special Provisions) Act No 40 of 1982 (g) The Treasury Certificates of Deposit Act (TCDA) of 1989 (h) The Fiscal Management (Responsibility) Act (FMRA) of 2003 (i) Annual Appropriation Acts for each year Pursuant to section 106(1) of MLA, CBSL is empowered to act as the fiscal agent and banker to the government, or agencies or institutions acting on behalf of the government, whether established by any written law or otherwise. Furthermore, as per section 113 of MLA, CBSL is vested with the responsibility of public debt management, as the agent of the government. As per section 114 of MLA, the government should obtain the advice of the Monetary Board on the monetary implications of a loan before raising such loan. The annual Appropriation Act authorizes the raising of loans in or outside Sri Lanka, on behalf of the government, to provide for the annual expenditure of the government. The annual Appropriation Act stipulates the aggregate amount of such borrowings. However, when the annual Appropriation Act is not available for a particular fiscal year, the Loans (Special Provisions) Act provides for raising loans in or outside Sri Lanka. Under the provisions of MLA, RSSO and LTBO, CBSL acts as the agent of the government for domestic borrowing through Treasury bonds, Rupee loans and Treasury bills. PDD services both domestic and foreign debt. SLDBs and International Sovereign Bonds are issued under FLA. Treasury Certificates of Deposit (TCDs) or Tax Reserve Certificates (TRCs) have not been issued in the recent years. Foreign concessional debt is raised by the Treasury s ERD, and serviced by PDD/ CBSL under FLA. 3. Primary Dealer System 3.1 Introduction A Primary Dealer (PD) is a specialized intermediary appointed by the Monetary Board of CBSL to deal in Sri Lanka government securities. In terms of the Regulations issued under LTBO and RSSO, PDs are appointed for the purpose of dealing with CBSL as a counter-party in the primary and secondary markets for government securities and to transact in government securities on their own account and for the account of their customers. The main purpose of the Primary Dealer system is to strengthen the market for government securities by: (a) helping to build a stable and dependable source of demand for securities, (b) providing liquidity in the secondary market, Public Debt Management in Sri Lanka 51

62 (c) building distribution channels (to act as intermediaries) and, (d) providing market information including prices, volumes and spreads between bids and offers. Accordingly, it is the responsibility of PDs to support the primary market in government securities by creating a stable demand for Treasury bills and Treasury bonds and to provide liquidity to the secondary market by trading in government securities. Therefore, the PD system is expected to help CBSL in lowering the cost and risk of public borrowing, facilitate the conduct of monetary policy and develop the financial market. PD system also encourages financial savings by providing risk free investments in government securities. 3.2 Primary Dealer System (PD system) in Sri Lanka The PD system first came into operation in Sri Lanka on 24 July 1992 with the appointment of 18 accredited PDs consisting of Licensed Commercials Banks and other financial institutions. The need for a dedicated PD system became evident as the Licensed Commercial Banks (LCBs) appointed as accredited PDs were keen to sell their own financial products rather than developing the government securities market. Accordingly, a dedicated PD system was introduced in the year 2000, with the appointment of 8 non-bank companies as dedicated PDs. In 2002, the PD system was expanded, giving the opportunity for LCBs to join the system. This was with a view of enhancing competition and infusing liquidity to the market. Further, LCBs were also expected to use their financial resources and branch network, to market government securities to a wider investor base, thereby increasing investor access to the government securities market. At present, 11 PDs (5 LCBs and 6 non-bank companies) are operating in the market. 3.3 Risks Encountered by PDs PDs as special financial intermediaries engaging in primary and secondary market trading in government securities are exposed to certain types of risks, even though they deal in government securities. The figure below explains the major risks encountered by PDs. Figure 2: risks encountered by PDs Adverse movements in interest rates Inability to meet cash flow obligations Market Risk Non-compliance with agreed terms of the transactions Liquidity Risk Primary Dealers Counterparty Risk Operational Risk Concentration Risk Breakdowns in systems and controls Due to structural arrangements 52 Public Debt Management in Sri Lanka

63 While PDs are expected to manage their risk exposures through a robust risk management mechanism, PDD supports strengthening the risk management of PDs by the regulation and supervision of PDs 3.4 Regulation and Supervision of PDs The supervision, examination and investigation of PDs is done by the Registrar of Public Debt in terms of LTBO and RSSO. A number of Regulations and Directions have been issued to PDs, under LTBO and RSSO. Further, PDD promoted a Code of Conduct (COC) for PDs in 2003, giving guidelines for their operations. Supervision is mainly done through on-site examinations and continuous off-site surveillance of PDs. 4. Regulations made by the Minister of Finance in terms of RSSO and LTBO. 4.1 The Registered Stock and Securities (Conversion into Scripless Treasury Bond ) Regulations No 1 of 2004 and Local Treasury Bills ( Conversion into Scripless Treasury Bill ) Regulations No 1 of These regulations facilitate the conversion of scrip from government securities into scripless form securities and provide the procedure to be followed in such conversion. 4.2 The Registered Stock and Securities (Transactions) Regulations No 2 of 2004 and Local Treasury Bills (Transactions) Regulations No 2 of These Regulations provide the methods of transferring scripless securities and the requirements for pledging, and carrying out repurchase and reverse repurchase transactions in scripless securities. 4.3 The Registered Stock and Securities (Recognition of Trusts) Regulations No 3 of 2004 and Local Treasury Bills (Recognition of Trusts) Regulations No 3 of These Regulations provide for the recognition of trusts and related matters in the Scripless Securities Settlement System. 4.4 The Registered Stock and Securities (Primary Dealers) Regulations No 1 of 2009 and Local Treasury Bills (Primary Dealers) Regulations No 1 of These Regulations authorise CBSL to appoint PDs, issue directions, supervise, suspend and cancel the appointment of PDs. The duties, responsibilities and conditions applicable to PDs are also mentioned in these Regulations. 5. Directions Issued to PDs CBSL has issued several directions to PDs to ensure that best practices are adopted, to strengthen the prudential requirements and to facilitate the supervisory framework. As at end 2010, the following directions were in force. 5.1 Direction on Segregation of Proprietary Government Securities Accounts - Effective Date 01/01/2002 Government securities acquired for trading on a regular basis to make profits from short-term changes in market prices have to be held in a trading account and should be marked to market using the secondary market weighted average yields compiled by the CBSL. Government securities acquired to be held to maturity should be held in an investment account, at cost, with few exceptions. Transfers between accounts are restricted, and, if there are transfers, a statement on portfolio transfers should be submitted to PDD. Public Debt Management in Sri Lanka 53

64 5.2 Direction on Financial Statements - Effective Date 01/01/2002 Every PD is required to prepare their annual financial statements in accordance with the Sri Lanka Accounting Standards. Annual financial statements audited by an external auditor registered with the CBSL should be submitted to PDD within 5 months from the end of the respective year and published in national newspapers within 6 months of the year end. Unaudited annual financial statements should be submitted to PDD within 3 months of the year end. Unaudited Balance sheet and Profit and Loss Statement for each half year, should be published in national newspapers within two months after the end of the respective half year. 5.3 Directions on Custodial and Trust Holdings of Scrip Securities Effective Date 01/01/2002 Every PD needs to maintain a separate register specified by PDD for scrip securities held by them on behalf of its customers. Customers securities should be physically segregated from their own securities, and held in safe and secure custody. 5.4 Direction on Secondary Market Quotes (Bid and Offer Prices) Effective date 11/03/2002 Every PD is directed to submit their buying and selling quotes for securities maturing up to 3 years to PDD by am on every business day. PDs are also required to disseminate information on their daily two way prices to the public. 5.5 Direction on New Products Effective Date 12/04/2002 Every PD is required to inform the details of any new product they intend to launch and obtain the concurrence of PDD, prior to the introduction of such product to the market. 5.6 Direction on the Establishment of a Branch Office by Primary Dealers Effective Date 12/04/2002 Every PD is required to inform and obtain the prior concurrence of PDD for the establishment of a branch or any other type of office, which proposes to engage in trading in government securities and primary dealer business. 5.7 Direction on Repurchase and Reverse Repurchase Agreements Effective Date 01/06/2002 This direction contains the definition and structure of repurchase transactions and the types of repurchase transactions 5.8 Direction on Secondary Market Actual Rates 15/07/2002 Every PD is required to submit actual buying and selling rates for securities transacted during the day to PDD by 4.00 pm on the relevant business day. 5.9 Direction on Forward Rate Agreements (FRAs) and Interest Rate SWAPs (IRSs) Effective Date 01/04/2003 This direction describes the financial derivatives such as Forward Rate Agreements (FRA) and Interest Rate Swaps for managing interest rate risks Direction on firm Two Way Quotes (Bid and Offer prices) for Benchmark Maturities Effective Date 02/07/2002 According to this Direction two way firm quotes for 3 and 12 months Treasury bills and 2 and 5 year Treasury bonds should be made for trading with public and those quotes need to be sent to PDD daily through and displayed on the Bloomberg screen. 54 Public Debt Management in Sri Lanka

65 5.11 Direction on Minimum Subscription Levels for Treasury Bill and Bond Auctions - Effective Date 15/08/2003 Every PD should subscribe to at least 10 per cent of the amount offered for each maturity at each Treasury bill and Treasury bond auction 5.12 Direction on Accounting for Repo and Reverse Repo Transactions Effective Date 19/12/2003 Every PD is required to record all repo and reverse repo transactions as collateralized borrowings/ lending. These encumbered securities should be put into a separate portfolio account. A note to the account should disclose the encumbered securities and the policy on haircut on the collateral Direction on Short Selling of Securities Effective Date 06/01/2004 PDs are prohibited from selling securities without actually holding the relevant securities in their portfolio. Securities obtained as collateral on reverse repo transactions are not considered as PD s own securities and they cannot be sold Direction on Adjusted Trading Effective Date 07/06/2004 Every PD is required to use current market prices for recording their transactions and should refrain from having adjusted trading or using away prices for recording transactions Direction on enhancement of minimum capital requirement, dividend distribution and maintenance of Tier II capital by primary dealers Effective date 01/07/2005. Every PD was required to increase the minimum capital up to Rs. 250 million from 01/07/2005 and to increase it further to Rs. 300 million from 01/07/2006. A PD which maintains a capital above Rs. 300 million, should transfer 25 per cent of its net profits after tax annually to a special risk reserve and a PD which maintained a capital between Rs.250 million and Rs.300 million by were allowed to declare a maximum of 25 per cent of their profits as dividends. PDs are allowed to maintain Tier II capital not exceeding 50 per cent of the Tier I capital Direction on Risk Weighted Capital Adequacy Framework for PDs Effective date 01/07/2006 Every PD is required to maintain a minimum required capital, net capital and risk weighted capital adequacy ratio (CAR) of 8%. It provides definitions, calculation methodology and reporting requirements relating to risk weighted capital adequacy ratio Direction on Restriction on Dividend Declaration Effective date 22/06/2009 Every PD is required to restrict dividends declaration to a maximum of 50 per cent of the realised profits earned between to Direction on Diversification of Primary Dealer Activities Effective date 02/12/2009 PDs are allowed to diversify their activities into areas such as fee based activities, investing in shares and debentures (subject to conditions). Every PD should maintain a separate record of diversified activities and report to PDD monthly. Public Debt Management in Sri Lanka 55

66

67 Glossary Average Time to Maturity - Weighted average time to maturity of all the debt securities/loans in the debt portfolio. Benchmark Bond - A bond that provides a standard against which the performance of other bonds can be measured. Government bonds are often used as benchmark bonds. This is also referred to as benchmark issue. Bunching of Debt Stock - An excessive amount of debt maturing on a given date or within a given period of time. Central Depository - A computerized central system which records primary issuance of scripless securities and their trades taking place in the secondary market. Concessionary External Loan - A Loan for which the grant element is 35 per cent or above when actual discount rates of currencies being considered. Coupon - The interest payment made to bond holders during the lifetime of the bond. Coupon payments are usually paid semi-annually. The annual amount of interest is equal to the principal value times the coupon rate. Debt Sustainability - The level of debt which allows a debtor country to meet its current and future debt service obligations in full, without recourse to further debt relief or rescheduling, avoiding accumulation of arrears, while allowing an acceptable level of economic growth. Duration - The weighted average maturity of the cash flows of a debt security. Floating Rate Bond A bond that has a variable coupon equal to a money market reference rate, like LIBOR plus a spread. The spread is a value that remains constant. Grace Period - Period of time provided for in a loan agreement for commencement of repayment of the loan. Grant Element A measure of concessionality of a loan, calculated as the difference between the face value of the loan and the sum of discounted future debt service payments to be made by the borrower expressed as a percentage of the face value of the loan. Index Linked Bond A bond, which pays a coupon, that varies according to some underlying Index usually the Consumer Price Index. Intra-day liquidity Funds, which can be accessed during a business day, usually to enable financial institutions to make payments on real time. LIBOR - The London Inter Bank Offered Rate. This rate is used as a reference rate by the international banking markets and is commonly the basis on which lending/borrowing margins are fixed. Maturity - Refers to the date on which the issuer has promised to redeem the issue by paying the principal value. The number of days or years until the date of redemption is called the maturity period. Monetization - The process of converting or establishing something into legal tender. It usually refers to the printing of bank notes by central banks Public Debt Management in Sri Lanka 57

68 Open Market Operations - The process of which the Central Bank buys or sells securities in the open market to control the volume of money (liquidity) or price of money (interest rates). Outright Transactions - Transactions by which ownership (title) of the securities are transferred to the buyer. Parity Variance - Effect of the appreciation/ depreciation of foreign currencies against the local currency on the existing foreign currency debt portfolio stated in the local currency Primary Dealer - An intermediary appointed by the CBSL to deal in government securities. Primary Market - Market where securities are first issued to buyers. Repayment Period - The period during which the debt obligation is to be repaid. Repurchase Transaction A transaction involving a sale of securities with an agreement to reverse the transaction on a future date. Risk Weighted Capital Adequacy Ratio - The ratio computed by dividing available capital by the risk weighted assets. Running Cost Ratio - The interest paid as a proportion of the outstanding debt stock at the beginning of the year. Rupee Loan - A medium to long-term debt instrument issued with maturities more than two years on tap basis or as private placements by the CBSL on behalf of the government under the Registered Stock and Securities Ordinance. Interest rates of this instrument are determined administratively. Scripless Securities - Treasury bills and Treasury bonds issued in book entry form or as paperless securities. Secondary Market - The market where securities are traded and exchanged among buyers and sellers after the securities are issued at the primary market. Special Drawing Rights - The unit of account of the IMF of which the value is based on a basket of key international currencies. Statutory Reserve Ratio Percentage of deposits, which the commercial banks should keep with the central bank, through which the central bank can influence their credit creating ability. Treasury Bill - A short-term debt instrument issued usually on a discount basis and for maturities of 91, 182, and 364 days by the CBSL on behalf of the government under the Local Treasury Bills Ordinance. Treasury Bond - A medium to long-term debt instrument issued by the CBSL on behalf of the government under the Registered Stock and Securities Ordinance. Yield The coupon or discount when expressed as a percentage of the price. Yield Curve - A graphical depiction of the relationship between the yield on the securities and different maturities. Zero Coupon Bond A bond that does not pay interest during the life of the bond. Instead, investors buy a zero coupon bond at a deep discount on the face value. The face value of the bond is paid at the maturity. 58 Public Debt Management in Sri Lanka

69 Statistical Appendix Table 1: Central Government Debt Table 2: Outstanding Central Government Debt (as at end year) Table 3: Composition of Outstanding Central Government Debt as at end year Table 4: Ownership of Outstanding Central Government Debt as at end year Table 5: Details of Outstanding Treasury bonds as at end 2010 Table 6: Details of Outstanding Sri Lanka Development Bonds as at end 2010 Table 7: Details of Outstanding Rupee loans as at end 2010 Table 8: Changes in Relative Composition of Government Securities Table 9: Maturity Profile of Domestic Debt as at end 2010 Table 10: Future Domestic Currency Debt Obligations as at end 2010 Table 11: Ownership of Treasury bills Table 12: Ownership of Treasury bonds Table 13: Ownership of Rupee loans Table 14: Composition of Outstanding Foreign Debt as at end 2010 Table 15: Ownership of Outstanding Foreign Debt Table 16: Foreign Loans Table 17: Foreign Loans Disbursements by Source Table 18: Government Debt Repayments and Interest Payments Table 19: Issues and Maturities of Domestic Debt in 2009 and 2010 Table 20: Auction and Primary Issue Details in 2009 and 2010 Table 21: Government Borrowing Limits and Usage in 2009 and 2010 Table 22: Financing of the Government Net Cash Deficit Table 23: Annualised Weighted Average Yield Rates of Treasury bills, Treasury bonds and Rupee loans Table 24: Treasury bond Auctions in 2010 Table 25: Treasury bill Auctions in 2010 Table 26: Secondary Market Transactions as Reported by Primary Dealers Table 27: Secondary Market Transactions Recorded in the LankaSecure Public Debt Management in Sri Lanka 59

70 Statistical Appendix Definitions and Explanatory Notes The following general notes supplement the footnotes given below the individual tables: 1. In an attempt to bring the material up-to-date provisional figures are included in some tables. 2. Figures in some tables have been rounded off to the nearest final digit. Hence there may be slight discrepancy between the total as shown and the sum of its components. 3. Differences as compared with previously published figures are due to subsequent revisions. 4. Values indicated within parenthesis are negative values. 5. The following symbols have been used throughout:- n.a. = not available - = nil = negligible 60 Public Debt Management in Sri Lanka

71 Central government DeBT Table 1 central Government Debt Rs. million Year (a) Treasury bills (b) Domestic Debt Rupee loans Treasury Other Total bonds (b) Foreign Debt (c) Total Debt As a % of GDP (d) Domestic Foreign Total , , , , , , , , , , , , , , , , , , , ,000 1, , , ,125 1, , , ,250 1, , , ,300 2, , , ,425 2, ,195 1,074 5, ,500 2, ,583 1,376 5, ,750 3, ,197 1,578 6, ,750 3, ,513 1,800 7, ,950 3, ,295 2,394 8, ,025 4, ,983 2,795 9, ,325 5, ,926 2,936 10, ,250 5, ,584 3,705 12, ,250 6, ,445 2,859 12, ,350 7, ,859 3,705 14, ,700 9, ,691 4,968 17, ,500 10,391-1,501 14,392 10,593 24, ,635 12,049-1,684 16,368 14,583 30, ,000 14,929-1,705 19,634 15,840 35, ,800 17,611-1,659 29,070 22,276 51, ,920 20,025-1,573 35,518 29,172 64, ,320 25,800-2,147 45,267 35,267 80, ,400 31,953-2,416 51,769 46,688 98, ,860 33,228-3,564 51,652 53, , ,280 36,570-3,761 62,611 67, , ,173 39,130-4,196 69,499 86, , ,850 44,957-4,190 78, , , ,700 49,797-5,099 98, , , ,246 54,217-6, , , , ,968 54,677-11, , , , ,968 66,823-12, , , , ,096 69,180-13, , , , , ,707-10, , , , , ,554-12, , , , , ,928-17, , , , , ,975-25, , , , , ,475 10,000 23, , , , , ,570 48,915 43, , , , , , ,867 51, , ,866 1,051, , , ,124 73, , ,040 1,218, , , , , , ,741 1,452, , , , , , ,956 1,670, , , ,107 69,153 1,019, ,882 1,863, , , ,349 91,396 1,143, ,138 2,139, , , , ,416 1,265, ,621 2,222, , , , ,813 1,479,230 1,103,418 2,582, , ,509 1,018, ,825 1,715,198 1,326,487 3,041, , ,009 1,281, ,641 2,140,228 1,448,734 3,588, , ,292 1,513, ,120 2,400,955 1,760,467 4,161, (e) 514,442 87,709 1,643, ,624 2,565,662 2,024,583 4,590, (a) From 1950 to 1973, outstanding position as at end September and since then as at end December. Sources : Central Bank of Sri Lanka (b) Excludes Treasury bonds and Treasury bills issued to non-residents and Treasury bonds of Rs. 4,397 million issued to CWE in Department of Census and Statistics (c) Includes Treasury bonds and Treasury bills held by non-residents and the outstanding defence loans. Outstanding balances at end 2006 and 2007 have been adjusted to clear arrears Excludes loan involving phase II of the Puttalam Coal Power Project (outstanding of Rs. 50,097 million as at end 2010) (d) From 2003, based on GDP estimates by the Department of Census and Statistics. (e) Provisional Public Debt Management in Sri Lanka 61

72 Central government DeBT Table 2 Outstanding Central Government Debt as at end year (a) Rs. million Item (b) Total Domestic Debt 1,479,230 1,715,198 2,140,228 2,400,955 2,565,662 By Maturity Short-term 313, , , , ,549 Treasury bills (c) 257, , , , ,442 Provisional advances from the Central Bank 49,015 60,679 76,308 73,881 77,879 Import bills held by commercial banks ,748 11,994 9,154 Other liabilities to the banking sector net of bank deposits 2,887 (8,747) 20,458 24,188 10,396 Other (Administrative Borrowing) 3,218 3,879 4,251 9,551 7,678 Medium and Long-term 1,166,012 1,351,999 1,623,863 1,840,309 1,946,113 Rupee loans (d) 116, , , ,292 87,709 Treasury bonds (e) 885,972 1,018,852 1,281,978 1,513,512 1,643,887 Treasury certificates of deposit Sri Lanka Development Bonds 62,469 86, , , ,877 Other (f) 100, ,179 53,071 46,427 40,640 By Debt Instrument 1,479,230 1,715,198 2,140,228 2,400,955 2,565,662 Rupee loans 116, , , ,292 87,709 Treasury bills (c) 257, , , , ,442 Treasury bonds (e) 885,972 1,018,852 1,281,978 1,513,512 1,643,887 Sri Lanka Development Bonds 62,469 86, , , ,877 Provisional advances 49,015 60,679 76,308 73,881 77,879 Other 107, ,686 90,528 92,160 67,869 By Institution 1,479,230 1,715,198 2,140,228 2,400,955 2,565,662 Banks 395, , , , ,716 Central Bank By debt instrument 117, , , ,593 78,376 Treasury bills (c) 69,370 44, ,584 37,451 2,993 Treasury bonds (e) Provisional advances 49,015 60,679 76,308 73,881 77,879 Other (761) (826) (644) (1,739) (2,496) Commercial Banks By debt instrument 277, , , , ,340 Rupee loans 22,088 15,870 15,870 17,252 17,615 Treasury bills (c) 52,805 68,818 87, , ,358 Treasury bonds (e) 46,595 58,416 90, , ,215 Sri Lanka Development Bonds 62,469 86, , , ,877 Other 93,889 80,938 65,550 62,186 39,276 Sinking fund Rupee loans Non bank sector By debt instrument 1,083,660 1,299,779 1,482,704 1,695,089 1,873,845 Rupee loans 94, , ,039 94,941 69,994 Treasury bills (c) 135, , , , ,091 Treasury bonds (e) 839, ,436 1,191,897 1,324,936 1,481,672 Other 14,201 30,574 25,622 31,713 31,089 By institution 1,083,660 1,299,779 1,482,704 1,695,089 1,873,845 National Savings Bank 166, , , , ,514 Employees Provident Fund 469, , , , ,341 Other 447, , , , ,990 Total Foreign Debt (g) 1,103,418 1,326,487 1,448,734 1,760,467 2,024,583 By Type 1,103,418 1,326,487 1,448,734 1,760,467 2,024,583 Project Loans 978,356 1,087,359 1,261,304 1,362,806 1,461,729 Non-Project Loans 125, , , , ,854 Commodity 69,021 68,665 66,499 62,304 54,653 Other (h) 56, , , , ,201 By Institution 1,103,418 1,326,487 1,448,734 1,760,467 2,024,583 Concessional Loans 1,023,077 1,099,911 1,227,222 1,271,142 1,266,910 Multi-lateral 564, , , , ,691 Bi-lateral 458, , , , ,218 Non-Concessional Loans 31,894 45,308 57,491 78, ,240 Multi-lateral 4,185 15,399 27,405 41,866 73,245 Bi-lateral 27,708 29,909 30,087 36,783 73,995 Commercial Loans 48, , , , ,433 International Sovereign bonds - 54,360 56, , ,906 Non-resident investments in Treasury bills - - 6,358 40,410 57,317 Non-resident investments in Treasury bonds - 49,647 17, , ,538 Other (h) 48,448 77,261 83, , ,672 Total Outstanding Government Debt 2,582,648 3,041,685 3,588,962 4,161,422 4,590,245 (a) Outstanding Treasury bills and Treasury bonds, have been adjusted for secondary market transactions. Sources : Central Bank of Sri Lanka (b) Provisional Ministry of Finance and Planning (c ) Excludes Treasury bills held by non-residents (d) Include long-term loans of Rs.24,088 million issued in (e ) Excludes government Treasury bonds of Rs. 4,397 million issued to CWE in November 2003 and Treasury bonds held by non-residents. (f ) Includes the outstanding balance to OBUs (g) Excludes loan involving phase II of the Puttalam Coal Power Project (outstanding of Rs. 50,097 million as at end 2010) (h) Includes outstanding defence loans 62 Public Debt Management in Sri Lanka

73 Central government DeBT Table 3 Composition of Outstanding central Government DebT as at end year Rs. million Source (a) 1. Foreign Debt 636, , , , ,620 1,103,418 1,326,487 1,448,734 1,760,467 2,024, Project Loans (b)(c) 542, , , , , ,356 1,087,359 1,261,304 1,362,806 1,461, Non-Project Loans 93,799 81,603 74,323 81,906 91, , , , , ,854 Commodity (d) 67,000 68,050 68,891 73,835 69,116 69,021 68,665 66,499 62,304 54,653 Other (e) 26,799 13,553 5,431 8,071 22,010 56, , , , , Domestic Debt 815, ,386 1,019,969 1,143,389 1,265,722 1,479,230 1,715,198 2,140,228 2,400,955 2,565, Rupee loans 292, , , , , , , , ,292 87, Treasury bills (f) 170, , , , , , , , , , Treasury bonds (f) 229, , , , , ,972 1,018,852 1,281,978 1,513,512 1,643, Sri Lanka Development Bonds 14,749 24,177 8,816 26,083 25,519 62,469 86, , , , Central Bank Advances (g) 30,127 31,033 31,204 34,791 39,746 49,015 60,679 76,308 73,881 77, Other (h) 78,107 47,352 29,133 30,522 74, , ,686 90,528 92,160 67,869 Total 1,452,706 1,670,343 1,863,851 2,139,527 2,222,342 2,582,648 3,041,685 3,588,962 4,161,422 4,590,245 (a) Provisional. Sources : Central Bank of Sri Lanka Ministry of Finance and Planning (b) Represents the amounts withdrawn and outstanding on the loans contracted with the IBRD, USA, Canada, Denmark, People s Republic of China, Germany, UK, India, IDA, ADB, Netherlands, Kuwait, OPEC, Japan, UAE, IFAD, Skandinaviska Enskilda Benkens -Sweden, Solomon Brothers Incorporated-New York, Bank of Indosuez, BFCE - France, Citibank International of USA, Australia, Austria, Saudi Arabian Fund, EIB, Hong Kong and Korea. ( c) Excludes loan involving phase II of the Puttalam Coal Power Project (outstanding of Rs. 50,097 million as at end 2010) (d) Represents the amounts withdrawn and outstanding on the loans contracted with the USA, Canada, Germany, Japan, France, India, Italy, Pakistan and Netherlands. (e) Includes cash loans received from the ADB, USA, China, Germany, Japan, OPEC, outstanding defence deffered loans, Treasury bonds and Treasury bills held by non-residents and sovereign bond issues. (f) Excludes outstanding Treasury bonds and Treasury bills issued to non-residents from 2007 and 2008 respectively. (g) Excludes contributions to international financial organizations. (h) Includes administrative borrowings arising from foreign loans channeled through government or semi-government agencies and outstanding balance of borrowing from Offshore Banking Units (OBUs). Public Debt Management in Sri Lanka 63

74 Central government DeBT Table 4 Ownership of outstanding central Government Debt as at end year (a) Rs.million Owner (b) 1. Domestic Debt 815, ,386 1,019,969 1,143,389 1,265,722 1,479,230 1,715,198 2,140,228 2,400,955 2,565, Banking Sector 256, , , , , , , , , ,716 Central Bank 92,871 76,342 44, ,017 78, , , , ,593 78,376 Commercial Banks 163, , , , , , , , , , Non-Bank Sector 559, , , , ,311 1,083,760 1,299,879 1,482,804 1,695,189 1,873,945 Market Borrowings 550, , , , ,547 1,069,577 1,289,688 1,478,553 1,685,638 1,866,267 Savings Institutions 94, , , , , , , , , ,514 Sinking Funds (c) Insurance Funds 21,449 26,853 24,828 27,398 20,704 13,234 21,012 25,976 34,490 32,839 Provident and Pension Funds (d) 245, , , , , , , , , ,279 Official Funds (e) 27,052 32,612 40,739 46,341 65,825 95, , , , ,374 Private Business and Individuals (f) 162, , , , , , , , , ,161 Non Market Borrowings 8,374 7,623 7,453 12,088 15,764 14,183 10,191 4,251 9,551 7, Foreign Debt (g) 636, , , , ,620 1,103,418 1,326,487 1,448,734 1,760,467 2,024,583 Total 1,452,706 1,670,343 1,863,851 2,139,527 2,222,342 2,582,648 3,041,685 3,588,962 4,161,422 4,590,245 (a) Outstanding Treasury bills and Treasury bonds have been adjusted for secondary market transactions. (b) Provisional. (c) The Public Debt Sinking Funds (the investment Fund w.e.f. September 1971) and the National Housing Sinking Fund. (d) Trusts, Benevolent, Pension and Provident Funds and Emplyees Provident Fund. (e) The Central Government, Local Authorities, State Corporations, Departmental and other official funds. (f) Includes the value of Treasury Certificates of Deposits. (g) Excludes loan involving phase II of the Puttalam Coal Power Project (outstanding of Rs. 50,097 million as at end 2010). Sources : Central Bank of Sri Lanka Ministry of Finance and Planning 64 Public Debt Management in Sri Lanka

75 Domestic DeBT Table 5 Details of Outstanding Treasury Bonds as at end 2010 (a) Maturity Date Issue Date Series ISIN Face Value (Rs. mn.) 15/01/ /01/ %2011A LKB00211A158 43,021 01/02/ /02/ %2011A LKB00511B019 44,922 15/02/ /02/ %2011A LKB00311B154 47,014 01/03/ /03/ %2011B LKB00211C014 46,679 15/06/ /06/ %2011B LKB00311F155 46,355 15/07/ /07/ %2011A LKB00211G155 45,576 01/08/ /08/ %2011B LKB00511H016 48,348 15/09/ /09/ %2011C LKB00311I159 44,568 15/10/ /10/ %2011C LKB00511J152 45,110 15/01/ /01/ %2012A LKB00312A154 51,516 15/02/ /02/ %2012B LKB00312B152 50,476 01/03/ /03/ %2012C LKB00512C015 51,532 01/04/ /04/ %2012A LKB00412D016 53,550 15/04/ /04/ %2012A LKB00612D151 58,032 01/07/ /07/ %2012B LKB00412G019 56,166 01/08/ /08/ %2012A LKB00212H011 29,568 15/10/ /10/ %2012B LKB00612J158 61,851 15/01/ /01/ %2013A LKB01013A157 65,151 01/02/ /02/ %2013A LKB00413B018 65,207 01/04/ /04/ %2013A LKB00613D019 51,075 15/06/ /06/ %2013A LKB00413F159 51,276 15/07/ /07/ %2013B LKB01013G154 52,792 01/08/ /08/ %2013A LKB01013H012 56,243 01/09/ /09/ %2013A LKB00313I015 7,012 01/11/ /11/ %2013B LKB01013K016 57,415 01/02/ /02/ %2014A LKB00414B016 25,945 01/03/ /03/ %2014A LKB00414C014 51,890 01/04/ /04/ %2014B LKB00614D017 51,763 01/06/ /06/ %2014B LKB00414F017 27,232 15/07/ /07/ %2014A LKB00514G152 55,635 15/03/ /03/ %2015A LKB00615C156 65,838 15/07/ /07/ %2015A LKB00515G159 64,904 01/08/ /08/ %2015A LKB00615H015 60,996 01/09/ /09/ %2015B LKB00615I013 61,710 01/04/ /04/ %2016A LKB00616D012 15,297 01/08/ /08/ %2016A LKB00616H013 51,234 01/10/ /10/ %2016B LKB00616J /02/ /02/ %2018A LKB01518B013 36,059 15/07/ /07/ %2018B LKB01518G /08/ /08/ %2018A LKB01518H150 15,109 01/05/ /05/ %2019A LKB01019E016 5,157 01/08/ /08/ %2020A LKB01020H017 6,518 01/10/ /10/ %2023A LKB02023J016 1,000 Total 43 1,827,425 (a) Includes Treasury bonds held by non-residents and excludes Rs. 4,397 million issued to CWE in Source: Central Bank of Sri Lanka Public Debt Management in Sri Lanka 65

76 Domestic DeBT Table 6 Details of Outstanding Sri Lanka Development Bonds as at end 2010 Maturity Date Issue Date Series ISIN Face Value (US Dollar mn.) 16/03/ /03/2009 SLDB2011B LKG00211C /06/ /06/2009 SLDB2011C LKG00211F /08/ /08/2009 SLDB2011D LKG00211H /03/ /03/2010 SLDB2012B LKG00212C /06/ /06/2010 SLDB2012C LKG00212F /09/ /09/2009 SLDB2012A LKG00312I /09/ /09/2010 SLDB2012D LKG00212I /03/ /03/2010 SLDB2013C LKG00313C /06/ /06/2010 SLDB2013D LKG00313F /07/ /07/2008 SLDB2013B LKG00513G /07/ /07/2010 SLDB2013E LKG00313G Total 11 1,567.1 Source: Central Bank of Sri Lanka Details of Outstanding Rupee Loans as at end 2010 Table 7 Maturity Date Issue Date Series Interest Rate Face Value (Rs. mn.) 30/03/ /03/ % ,904 01/04/ /04/ % ,634 01/07/ /07/ % /10/ /10/ % /04/ /04/ % ,575 01/04/ /04/ % ,868 01/10/ /10/ % /10/ /10/ % /04/ /04/ % ,000 01/05/ /05/ % A ,366 01/07/ /07/ % ,063 01/10/ /10/ % ,824 01/02/ /02/ % ,088 Total 13 87,709 Source: Central Bank of Sri Lanka 66 Public Debt Management in Sri Lanka

77 Domestic DeBT Table 8 Changes in Relative Composition of Government Securities (a) Maturity (%) Short-term Medium and long-term Marketability (%) Marketable Non-marketable Investor base (%) Central Bank Commercial banks Captive sources Others Maximum maturity in the yield curve (yrs) Primary market Secondary market (a) Total Treasury bills, Treasury bonds, Rupee loans only. Excludes Treasury bills and Treasury bonds held by non-residents Sources : Central Bank of Sri Lanka Ministry of Finance and Planning Table 9 Maturity Year Maturity Profile of Domestic Debt as at end 2010 (a) Instrument Treasury bill (b) Treasury bond (b) (c) Rupee loan SLDB (d) OBU loans (d)(e) Rs. million Total , ,148 6,917 55, , ,263 3,575 35,172 16, , ,548 2,874 83, , , , ,998 31, , , , , , , , , , , , ,000 24, ,088 Total 514,442 1,643,887 87, ,877 17,087 2,437,001 (a) Other liabilities to the banking sector are not included. (b) Excludes Treasury bonds and Treasury bills issued to non-residents. (c) Excludes Treasury bonds of Rs. 4,397 million issues to CWE in (d) Exchange rate used for conversion is 1 US Dollar=Rs (End 2010 rate). (e) Includes the loans worth US Dollar 4 million raised from NSB in 2007 and Source : Central Bank of Sri Lanka Public Debt Management in Sri Lanka 67

78 Domestic DeBT Table 10 Future Domestic Currency Debt Obligations as at end 2010 (a) Rs. million Year Capital Interest Grand Total , ,963 1,171, , , , , , , ,218 75, , ,758 61, , ,119 26,554 86, ,824 11,612 30, ,792 20,279 58, ,508 5,233 8, ,805 5,077 9, ,961 2, ,961 2, ,088 1,515 26,603 Grand Total 2,195, ,765 3,039,778 Source : Central Bank of Sri Lanka (a) Represents interest and capital payments due on Treasury bonds, Treasury bills and Rupee loans as at end Capital payments are in book values and interest payments include coupon payments and discounts on Treasury bills, Treasury bonds and Rupee loans. Table 11 Ownership of Treasury Bills (a)(b) Rs. million Ownership (c) 1.Bank Sector 75,934 73,818 58, ,843 78, , , , , , Central Bank 64,842 44,923 13,365 78,162 38,951 69,370 44, ,584 37,451 2, Commercial Banks 11,092 28,895 44,637 40,681 39,151 52,805 68,818 87, , , Non Bank Sector 95, , , , , , , , , , Employees Provident Fund 3,112 2,953 5,198 5,000 5,659 4,793 5, , Other Provident Funds Savings Institutions 13,889 22,645 36,534 31,513 39,938 33,456 32,046 20,791 42,677 52, Insurance and Finance Companies 7,576 9,179 7, ,034 5,963 8,623 10,988 7,192 12, Departmental and Other Official Funds 547 3,040 6,898 9,957 19,574 28,173 29,481 16,431 21,452 20, Private and Other 69,937 98, ,016 77,206 72,867 63, , , , ,858 Total 170, , , , , , , , , ,442 Sources : Central Bank of Sri Lanka Ministry of Finance and Planning (a) Adjusted for secondary market transactions. (b) Excludes outstanding Treasury bills of Rs. 6,358 million, Rs. 40,410 million and Rs. 57,317 million issued to non-resident investors in 2008, 2009 and 2010 respectively. (c) Provisional. 68 Public Debt Management in Sri Lanka

79 Domestic DeBT Table 12 Ownership of Treasury Bonds (a)(b)(c) Rs million Ownership (d) 1. Bank Sector 22,214 35,523 65,246 33,350 55,118 46,595 58,416 90, , , Central Bank 1, Commercial Banks 20,598 35,523 65,246 33,350 55,118 46,595 58,416 90, , , Non-Bank Sector 206, , , , , , ,436 1,191,897 1,324,936 1,481, Employee s Provident Fund 64, , , , , , , , , , Other Provident Funds ,940 7,862 9,507 13,766 19, Savings Institutions 28,964 42,292 54,499 92, , , , , , , Insurance and Finance Companies 16,258 21,159 20,740 26,551 8,214 13,632 21,215 26,410 33,194 33, Departmental and Other Official Funds 16,061 17,010 17,375 23,641 34,922 58,061 69,588 90,778 21,949 36, Private and Other 80, , , , , , , , , ,957 Total 229, , , , , ,972 1,018,852 1,281,978 1,513,512 1,643,887 Sources : Central Bank of Sri Lanka Ministry of Finance and Planning (a) Adjusted for secondary market transactions. (b) Excludes government Treasury bonds of Rs. 4,397 million issued to CWE in November (c) Excludes outstanding Treasury bonds of Rs.49,646 million, Rs. 17,647 million, Rs 145,124 million and Rs. 183,538 million issued to non-resident investors in 2007, 2008, 2009 and 2010 respecively. (d) Provisional. Ownership of Rupee Loans Table 13 Rs. million Ownership (a) 1. Bank Sector 44,068 43,981 43,481 41,481 41,481 22,088 15,870 15,870 17,252 17, Central Bank Commercial Banks (b) 44,068 43,981 43,481 41,481 41,481 22,088 15,870 15,870 17,252 17, Non Bank Sector 248, , , ,277 99,081 94, , ,139 95,040 70, Savings Institutions (c) 53,123 51,695 47,906 27,418 25,418 20,938 19,938 18,820 18,820 12, Sinking Funds Departmental and Other Official Funds 10,444 11,732 17,550 12,742 9,754 9,755 8,410 8,400 6,111 6, Employees Provident Fund 177, , ,319 74,308 56,068 56,068 68,921 68,539 56,583 40, Other Provident Funds 6,351 7,019 7,144 5,425 6,105 6,132 12,320 12,327 11,417 10, Insurance Corporations Insurance Companies Other State Corporations ,575-1,575 1,575 1,575 1,575 1, Other (d) , ,375 4, Total 292, , , , , , , , ,292 87,709 Sources : Central Bank of Sri Lanka Ministry of Finance and Planning (a) Provisional. (b) Includes long-term loans issued by the government in connection with the restructuring of the two state banks in 1993 and 1996 respectively. (c )Includes the value of long-term loans of Rs.4,480 million issued by the governmnet to re-capitalise the liabilities of the NSB in (d) Comprises Co-operative Banks, other companies, clubs, institutions and individuals. Public Debt Management in Sri Lanka 69

80 Foreign Debt Table 14 Composition of Outstanding Foreign Debt AS AT END 2010 (a) Creditor Category/ Use of Funds Bi-lateral Multi-lateral Commercial Export Credit Total Debt % of Total Cash (b) , , Commodity 12, , Food 26, , Goods & Services 11, ,691 15, Programme 13,543 89, , Project (c) 647, ,746 4, ,263 1,358, Other (d) , , , Total Debt 711, , , ,022 2,024, % Rs. million (a) Provisional Sources : Central Bank of Sri Lanka (b) Include Sovereign bonds issued in 2007, 2009 and 2010 Ministry of Finance and Planning (c) Excludes loan involving phase II of the Puttalam Coal Power Project (outstanding of Rs. 50,097 million as at end 2010) (d) Includes Treasury bonds and Treasury bills held by non-residents. Table 15 Ownership of Outstanding Foreign Debt Rs. million Source (a) 1. Multi-lateral 289, , , , , , , , , ,936 ADB 136, , , , , , , , , ,872 EIB ,545 4,838 9,345 15,326 18,010 20,463 18,792 IBRD IDA 146, , , , , , , , , ,217 IFAD 5,532 6,381 7,116 7,886 7,109 7,997 8,719 9,052 10,309 11,032 OPEC ,329 1,582 2,098 2,357 2,355 2,173 1,913 Nordic Development Fund ,023 1,431 1,662 2,537 3,188 3,285 3,360 3, Bi-lateral 305, , , , , , , , , ,213 Canada 6,582 6,626 7,746 8,521 8,635 8,753 9,852 7,718 8,488 8,134 France (b) 6,439 7,596 8,735 10,177 8,726 9,714 10,255 12,424 15,021 18,427 Germany 32,953 39,545 46,657 56,301 49,374 61,644 65,977 61,528 58,279 50,263 India 1,855 2,786 6,702 10,311 10,118 12,382 14,843 15,294 17,902 17,292 Japan 185, , , , , , , , , ,931 Kuwait 2,497 2,884 2,939 3,388 3,573 3,794 3,855 4,649 5,103 5,237 Netherlands 2,453 2,610 2,645 2,574 2,196 2,080 1, People s Republic of China 3,219 3,373 3,115 3,342 3,604 5,121 22,668 29,688 46,641 56,459 Saudi Arabian Fund ,217 2,328 2,338 USA 58,064 57,937 55,229 57,078 55,341 57,310 52,797 50,708 46,952 42,414 Other 6,305 8,499 9,881 12,387 13,892 19,508 54,339 55,619 56,978 59, Financial Markets 41,544 31,624 39,801 53,579 63,401 82, , , , ,433 Riggs National Bank 3,754 3,831 3,746 3,980 3,769 3,843 3,746 3,674 3,476 3,140 Indo-Suez Bank (France & Stockholm) Bankers Trust Co France Solomon Bros. Inc. - New York Citi Bank/NEXI - - 9,635 10,433 18,082 27,122 24,637 11, Other 34,874 25,676 24,640 37,411 40,055 50, , , , ,670 International Sovereign bonds ,360 56, , ,906 Non-resident investments ,358 40,410 57,317 in Treasury bills Non-resident investments ,647 17, , ,538 in Treasury bonds Other (c) 34,874 25,676 24,640 37,411 40,055 50,206 47,715 67, , ,909 Total 636, , , , ,620 1,103,418 1,326,487 1,448,734 1,760,467 2,024,583 (a) Provisional. Sources : Central Bank of Sri Lanka (b) Includes loans from Financial Institutions. Ministry of Finance and Planning (c) Includes outstanding defence loans and Excludes loan involving phase II of the Puttalam Coal Power Project (outstanding of Rs. 50,097 million as at end 2010) 70 Public Debt Management in Sri Lanka

81 Foreign Debt Table 16 Type and Source Foreign Loans Gross Receipts Repayments Net Change in the Liability (a) Rs. million Liability as at end December 1. Project Loans 163,860 55,360 98,923 1,461,729 ADB 34,492 11,813 (92) 344,465 Australia 1,495 1, ,838 Austria 1, ,849 Canada (225) 5,660 China (b) 38,837 1,219 35, ,240 Denmark 4,549 1,349 1,270 19,472 EIB (1,671) 18,792 Finland (761) 3,536 France 7, ,328 20,162 Germany 1,015 3,271 (7,025) 44,068 Hong Kong ,865 India 1, ,773 IDA 16,328 6,732 (2,857) 281,217 Japan 35,047 21,974 54, ,291 Korea 4, ,696 21,388 Kuwait ,237 Netherlands 2, ,948 7,455 Opec Fund for International Development (260) 1,913 Saudi Arabian Fund ,338 Spain (647) 4,920 Sweden 3, ,881 9,250 UK 8, ,985 27,195 USA - 1,535 (2,188) 20,207 Other 1, , Non-Project Loans 164,018 22, , , Commodity Loans 126 6,100 (7,651) 54,653 Canada (129) 2,474 France - 44 (69) 178 India 126 1,212 (1,460) 11,518 Pakistan (515) 4,759 Germany (921) 5,741 Netherlands - 92 (107) 87 USA (c) - 2,110 (2,964) 26,386 Japan - 1,869 (1,486) 3, Other Loans 163,892 16, , ,201 ADB ,304 14,407 China (126) 798 USA Germany - 18 (70) 455 Japan Other (d) 163,892 16, , ,541 Memo: Liability due to variations in exchange rates 1,354 Grand Total 327,878 78, ,116 2,024,583 Sources : Central Bank of Sri Lanka (a) Includes the impact of exchange rate variation. Ministry of Finance and Planning (b) Excludes disbursements of Rs. 51,487 million and outstanding of Rs. 50,097 million as at end 2010 of the loan involving phase II of the Putta lam Coal Power Project (c) Comprises P.L. 480 loans and loans from the Agency for International Development. (d) Includes Treasury bonds and Treasury bills held by non-residents and defence loan. Public Debt Management in Sri Lanka 71

82 Foreign Debt Table 17 Foreign Loan Disbursements by Source Rs. million Category Disbursements (a) 1. Lender 47,316 47,170 87,638 78,299 75,180 92, , , , ,878 Bi-lateral 26,455 18,382 29,888 35,110 25,552 38,614 50,102 42,248 60,131 59,272 Multi-lateral 12,500 23,787 41,119 29,219 35,014 33,942 29,126 39,981 48,547 52,685 Commercial (b) 6,382-10,082 5,268 10,208 10,756 95,147 31, , ,892 Export Credits 1,979 5,001 6,549 8,702 4,406 8,984 8,671 16,272 38,353 52, Use of Funds 47,316 47,170 87,638 78,299 75,180 92, , , , ,878 Cash (b) ,209 9,138 56,202-57, ,926 Commodity Food Goods & Services ,321 3, ,227 2, Programme 2,252 6,389 33,012 3,091 1,987 5, , ,788 Project (c) 36,557 39,559 52,220 66,331 62,472 73,052 84, , , ,770 Technical Assistance Other (d) 6, ,268-1,390 38,941 14, ,351 51,967 (a) Provisional Sources : Central Bank of Sri Lanka (b) Include Sovereign bonds issued in 2007, 2009 and 2010 Ministry of Finance and Planning (c) Excludes disbursements of Rs. 51,487 million of the loan involving phase II of the Puttalam Coal Power Project, for 2010 (d) Includes Treasury bonds and Treasury bills(net) issued to non-residents since Public Debt Management in Sri Lanka

83 Debt Service PaymeNTS Table 18 Government Debt Repayments And Interest Payments Rs. million Year Principal Repayments Interest Payments Domestic (a) Foreign (b) Total Domestic (c) Foreign (d) Total ,165 1, , ,182 1, , ,502 1, , , ,608 3, , , ,612 4, , ,860 1,165 5,025 5,336 1,270 6, ,465 2,229 5,115 1,623 6, ,108 1,789 6,897 5,458 1,970 7, ,505 3,020 7,525 6,553 2,209 8, ,690 5,592 7,593 2,564 10, ,471 5,209 9,680 9,694 2,896 12, ,796 5,742 9,538 11,015 3,337 14, ,304 4,906 12,210 16,990 3,678 20, ,901 4,881 17,782 17,960 4,113 22, ,123 7,955 26,078 21,201 4,739 25, ,327 6,963 27,290 25,101 5,102 30, ,065 7,606 22,671 32,520 5,511 38, ,069 8,477 36,546 32,064 6,162 38, ,749 10,491 33,240 42,184 6,739 48, ,232 13,251 28,483 48,554 6,692 55, ,617 18,351 59,968 47,598 7,300 54, ,322 21,440 41,762 53,371 8,752 62, ,244 23, ,526 62,185 9,015 71, ,844 27,921 84,765 84,560 9,747 94, ,786 37, , ,897 10, , ,083 34, , ,540 11, , ,740 33, , ,878 13, , ,347 21, , ,164 6, , ,536 45, , ,787 16, , ,900 65, , ,701 23, , , , , ,198 30, , , , , ,977 35, , (e) 389,672 78, , ,127 55, ,592 Sources : Central Bank of Sri Lanka (a) Excludes Treasury bond payments to non-residents. Ministry of Finance and Planning (b) Includes Treasury bond payments to non-residents and pre-mature liquidation of non-resident investments. (c) ExcludesTreasury bill & Treasury bond interest payments to non-residents. (d) Includes Treasury bill & Treasury bond interest payments to non-residents. (e) Provisional. Excludes foreign interest payments of Rs. 979 million for the loan involving phase II of the Puttalam Coal Power Project. Public Debt Management in Sri Lanka 73

84 government borrowings Table 19 Maturity Issues and Maturities of Domestic Debt in 2009 and 2010 (a) Rs. million Issues Repayments Net Issues Issues Repayments Net Issues Treasury bills 91 day 117, ,473 14, , ,955 4, day 188, ,518 34, , ,191 11, day 247, , , , ,046 34,513 Other 267, ,218 (81,267) 331, ,560 40,800 Total 821, ,728 72,483 1,000, ,752 90,317 Treasury bonds 1 year 3,100 46,778 (43,678) 28,865 7,321 21,544 2 year 159,506 72,340 87,166 98, ,295 (108,479) 3 year 185, ,061 72, ,158 50,511 70,647 4 year 118,449 19,348 99,101 66,889 65,292 1,597 5 year 86,032 15,000 71, ,767 7,368 97,399 6 year 143,172 75,900 67,272 68,265 2,000 66,265 7 year ,950-1,950 8 year ,280-11,280 9 year year 5,089-5,089 6,518-6,518 Total 701, , , , , ,789 Rupee loans 2 year 1,904 4,461 (2,557) /5 year (500) 2/6 year (872) 4/6 year - 3,750 (3,750) /8 year - 4,410 (4,410) /10 year ,211 (23,211) 9/10 year - 7,000 (7,000) Total 1,904 19,621 (17,717) - 24,583 (24,583) Sri Lanka Dev. Bonds 2 year 57,319 24,590 32,730 31,303 60,120 (28,817) 3 year 4,707 29,872 (25,165) 39,889-39,889 Total 62,026 54,462 7,564 71,193 60,120 11,073 Loans from OBUs <= 1 year ,787 (6,787) 2 years - 19,289 (19,289) years 11,443-11, Total 11,443 19,289 (7,847) - 6,787 (6,787) Grand Total 1,598,022 1,184, ,495 1,579,838 1,341, ,809 (a) Face Value. Source : Central Bank of Sri Lanka Auction and Primary Issue Details in 2009 and 2010 (a) Table 20 Rs. million Treasury bills Treasury bonds Rupee loans Treasury bills Treasury bonds Rupee loans Auctions Number of Auctions Amount Offered 446,500 71, ,750 36,500 - Amount Received 1,004, ,192-1,232, ,205 - Amount Accepted 416,157 52, ,146 46,098 - CBSL Purchases 190, , Placements 214, ,207 1, , ,478 - Total Issues 821, ,438 1,904 1,000, ,576 - (a) Face Value. Source: Central Bank of Sri Lanka 74 Public Debt Management in Sri Lanka

85 Government Borrowings Table 21 Government Borrowing Limits and Usage in 2009 and Rs. million Approved Limit (a) Usage Approved Limit Usage 1. Gross Borrowing 815, , , , Domestic 574, , , , Foreign 241, , , , Sources of Financing 2.1. Domestic Financing 574, , , , Rupee loans - 1, Treasury bonds (b) 464, , , , Treasury bills (net) (b) 40,000 49,009 40,000 82, CBSL Advances 9,000-12,000 3, SLDBs 55,000 62,026 74,000 71, OBU Loans 6,000 11, Other - 9,054-2, Foreign Financing 241, , , , Project/Programme Loans (c) 129, , , , Other (d) 112, , , ,018 Total Financing 815, , , ,110 Sources : Central Bank of Sri Lanka Ministry of Finance and Planning (a) Gross limit revised from initial Plan of Rs.815 billion (excluding Rs. 25 billion reserved for contingencies) to Rs. 1,050 billion (b) Excludes Treasury bonds & Treasury bills issued to non-residents (c) Excludes disbursements of Rs. 51,487 million of the loan involving phase II of the Puttalam Coal Power Project, for 2010 (d) Includes Treasury bonds, Treasury bills(net) issued to non-residents, International Sovereign bonds and non-project loans Public Debt Management in Sri Lanka 75

86 government borrowings Table 22 Financing of the Government Net Cash Deficit Rs. million Item (a) 1. NET CASH SURPLUS (+) / DEFICIT (-) (142,991) (136,464) (133,123) (162,501) (177,424) (215,516) (262,252) (322,329) (486,626) (450,982) 1.1 Revenue and grants 258, , , , , , , , , , Expenditure (b) (401,312) (420,973) (441,839) (503,618) (606,067) (742,951) (876,581) (1,030,925) (1,232,984) (1,312,295) 2. FINANCING OF THE DEFICIT 142, , , , , , , , , , Domestic Financing 123, ,351 79, , , , , , , , Domestic Market Borrowings 122, ,167 79, , , , , , , ,999 Rupee loans 50,910 38,419 48, , ,833-1,904 - Less: Direct Repayments 21,986 43,532 87,400 84,219 67,875 23,873 8,500 1,500 19,621 24,583 Net 28,924 (5,112) (39,287) (83,656) (24,196) (23,850) 10,333 (1,500) (17,717) (24,583) Treasury bills 30,032 39,835 14,917 25,026 (9,402) 20,300 37,092 69,766 49,008 82,796 Treasury bonds 21, , , , ,113 97,429 52, , , ,440 Sri Lanka Development Bonds (SLDBs) 14,605 8,799 (15,179) 16,361-34,254 23,592 65,497 7,564 11,073 Central Bank Advances 2, ,587 4,955 9,269 11,664 15,629 (2,428) 3,998 Other Borrowings from Banks (c) 39,639 (42,196) (15,617) (2,109) 47,492 33,874 (3,025) (43,598) (2,918) (7,291) Use of Cash Balances (14,296) 15,896 (2,268) (3,316) (7,659) (6,818) (5,386) 11,544 (1,169) (14,434) Domestic Other Borrowings (d) 719 (816) 80 4,680 4,300 (650) 18,060 4,618 11,280 9, Foreign Financing 19,396 10,113 53,213 45,256 53,821 51, ,115 8, , , Project Loans 33,375 45,877 85,317 69,600 64,691 78,254 72, , , ,860 Less: Repayments 14,398 17,737 20,422 24,472 17,274 33,715 39,108 47,762 66,059 55,360 Net 18,977 28,140 64,895 45,128 47,417 44,539 33,763 66,838 80, , Non-project Loans 419 (18,027) (11,682) 128 6,404 7,169 83,352 (58,820) 160, ,194 Commodity Loans 190 1,293 2,321 3, ,227 2, Less: Repayments 4,789 5,328 4,783 5, ,163 5,417 5,771 5,871 6,100 Net (4,599) (4,035) (2,462) (2,297) (110) (1,936) (2,907) (5,713) (5,557) (5,974) Other loans (e) 13, ,501 10,209 16, ,848 14, , ,893 Less: Repayments 8,734 13,992 9,220 3,076 3,695 7,111 19,589 68,077 42,786 16,724 Net 5,018 (13,992) (9,220) 2,425 6,514 9,105 86,259 (53,107) 165, ,169 Sources : Central Bank of Sri Lanka Ministry of Finance and Planning (a) Provisional (b) Consists of government expenditure excluding contributions to sinking funds, direct repayment of public debt and subscriptions to international financial organisations. Also excludes book adjustments arising from losses on Advance Account operations incurred and financed in previous financial years. Hence, the figures may not tally with the figures published in the Accounts of the Government of Sri Lanka. (c) Includes cash items in process of collection in the Central Bank and commercial banks, government import bills, overdraft and borrowings from offshore banking units of commercial banks. (d) Includes domestic grants and administrative borrowings and payments to be made (e) Includes cash loans received from the Iraq, China, OPEC, Japan and military equipment loans and Euro currency commercial loans. 76 Public Debt Management in Sri Lanka

87 cost of borrowing Table 23 Annualized Weighted Average Yield Rates of Treasury bills, Treasury bonds and Rupee loans (a) Per cent per annum Instrument Treasury bills (Days) (b) Overall average Treasury bonds (Years) Overall average Rupee loans (Years) (c) Overall average Overall average Source : Central Bank of Sri Lanka (a) Net of 10% withholding tax. Effective from May 3, 2002, government has imposed withholding tax on interest of government securities. (b) The issue of Treasury bills with maturities of 91 days, 182 days, and 364 days in place of 3,6,12 month maturities respectively, commenced in October, (c) For Callable Rupee loans the compulsory date of repayment was considered. Public Debt Management in Sri Lanka 77

88 cost of borrowing Table 24 Treasury Bond Auctions in 2010 Series Settlement Date Maturity Date Maturity Period (Years) Amount Offered (Rs. mn.) Bid Received (Rs. mn.) Bid Accepted (Rs. mn.) Coupon Rate Weighted Average Yield (a) 12.00%2011A 01/01/ /07/ ,000 2, %2013A 01/01/ /06/ ,000 1, %2012B 15/01/ /02/ ,500 3,300 1, %2014B 15/01/ /04/ ,500 3,260 1, %2015B 15/01/ /09/ ,000 2,310 1, %2012B 03/05/ /10/ ,250 4,450 1, %2013A 03/05/ /08/ , %2012A 07/05/ /04/ ,902 1, %2014B 07/05/ /04/ , %2014B 17/05/ /04/ ,000 3,313 2, %2015B 17/05/ /09/ ,000 2, %2012A 04/06/ /04/ , %2013A 04/06/ /08/ %2014A 01/07/ /03/ ,000 4,500 2, %2016A 01/07/ /04/ ,000 3,130 1, %2014A 15/07/ /03/ ,000 3,895 2, %2016A 15/07/ /04/ ,000 2,120 1, %2014A 23/07/ /03/ ,000 6,075 2, %2015B 30/07/ /09/ ,000 3,475 1, %2016A 30/07/ /04/ , %2014B 06/08/ /06/ ,000 2,575 1, %2016A 06/08/ /08/ ,000 2,200 1, %2020A 06/08/ /08/ , %2015A 16/08/ /07/ ,000 3,600 1, %2016A 16/08/ /08/ ,000 3,750 2, %2012A 27/08/ /08/ , %2013B 27/08/ /07/ %2014B 27/08/ /06/ ,000 2,650 1, %2015A 01/09/ /07/ ,000 3,750 1, %2016A 01/09/ /08/ ,000 3,100 1, %2020A 01/09/ /08/ , %2016A 09/09/ /08/ ,000 6,535 2, %2018A 09/09/ /02/ , %2015A 15/09/ /07/ ,250 3,580 1, %2016A 15/09/ /04/ ,250 4,025 2, %2018A 15/09/ /08/ ,000 1,950 1, %2020A 15/09/ /08/ , %2013A 15/12/ /09/ , %2014B 15/12/ /06/ , Source: Central Bank of Sri Lanka (a) Effect from May 3, 2002, government imposed a 10% withholding tax on interest of government securities. The rates quoted are net of this tax. 78 Public Debt Management in Sri Lanka

89 cost of borrowing Table 25 Treasury Bill Auctions in 2010 Issue Date 91 Days Amount Offered (Rs. mn.) 182 Days 364 Days 91 Days Amount Received (Rs. mn.) 182 Days 364 Days 91 Days Amount Accepted (Rs. mn.) 182 Days 364 Days 91 Days Weighted Average Yield Rates (a) 01/01/2010 2,000 3,000 3,750 3,766 6,150 7,369 2,176 3,644 2, /01/2010 2,000 3,500 4,500 3,946 8,745 6,755 2,681 5,345 4, /01/2010 2,000 3,000 4,000 2,862 5,046 7,035 1,337 2,831 3, /01/2010 1,500 3,000 4,500 3,095 9,024 6,706 2,225 4,350 3, /01/2010 2,500 3,750 4,750 3,260 8,440 5, ,235 1, /02/2010 2,500 3,000 4,500 4,930 8,935 6,786 2,724 5,596 1, /02/2010 3,000 3,500 5,500 5,405 10,515 7,354 3,914 5, /02/2010 3,000 4,000 5,500 5,370 8,405 7,669 4,395 5,939 1, /02/2010 3,000 4,000 5,500 5,899 9,311 7,063 3,681 6,906 2, /03/2010 2,500 3,750 4,750 4,345 8,618 5,516 2,873 6, /03/2010 3,000 3,500 4,000 5,154 12,241 3, /03/2010 3,000 3,500 4,000 5,751 7,870 4,573 3,295 5, /03/2010 2,500 3,500 4,000 6,598 6,868 4,575 5,343 4, /04/2010 2,500 3,500 4,000 3,397 5,213 4,900 1,752 2, /04/2010 2,000 2,500 2,000 2,990 5,266 3, /04/2010 1,500 2,000 2,000 4,912 5,413 2,895 2,542 1,582 1, /04/2010 1,500 3,000 4,000 4,140 18,984 6,198 2,303 6,900 3, /04/2010 1,000 2,500 4,000 4,058 14,484 12,168 1,000 2,500 7, /05/2010 1,000 4,000 7,000 6,169 16,711 11,975 1,000 4,000 8, /05/2010 1,000 4,000 7,500 2,816 13,406 10,712 1,000 6,015 3, /05/2010 1,000 4,500 7,500 5,783 8,450 10,394 2,129 6,900 2, /05/2010 1,000 4,500 7,500 3,864 5,966 8,520 1,711 2,674 2, /06/2010 1,000 3,250 4,750 2,577 8,345 6,828 1,617 5,499 2, /06/2010 1,000 3,500 4,500 2,235 8,689 7,463 1,753 4,710 3, /06/2010 1,000 4,250 4,750 3,128 7,413 7,869 1,397 5,666 3, /06/2010 1,500 4,500 5,000 3,057 6,849 7,063 2,177 4,500 4, /07/2010 1,750 4,250 5,000 3,061 11,932 6,711 1,559 9,974 1, /07/2010 1,500 5,500 5,000 4,005 8,290 8,103 2,030 4,925 3, /07/2010 1,500 5,500 5,000 3,150 14,589 16,187 1,560 6,000 5, /07/2010 1,000 5,500 6,500 2,880 9,401 20,666 1,000 5,500 7, /07/2010 1,500 5,000 6,500 2,834 12,355 22,782 1,624 5,325 6, /08/2010 1,000 4,500 6,500 2,365 14,520 28,093 1,100 4,815 7, /08/2010 1,000 4,500 5,500 2,441 9,060 18,002 1,205 4,881 6, /08/2010 1,000 4,500 5,500 2,518 7,515 17,405 1,250 4,535 5, /08/2010 1,000 3,000 6,000 3,642 11,421 12,445 1,000 3,190 6, /09/ ,000 6,500 1,282 8,303 17, ,000 6, /09/2010-3,000 6,500-13,174 22,381-3,000 6, /09/2010-3,000 7,000-8,054 16,629-3,000 7, /09/2010-3,000 7,000-10,662 21,463-3,000 7, /10/2010-4,000 8,000-10,532 19,255-4,000 8, /10/2010-3,500 7,500-4,488 17,523-1,888 4, /10/2010-2,500 6,500-4,198 7,567-1, /10/2010 1,000 2,000 7,000 2,200 3,184 9,635 1,104 1, /10/2010 2,000 4,000 6,000 5,085 6,060 8,405 2,720 4,019 3, /11/2010 3,000 5,000 5,000 7,715 12,597 9,475 2,790 5,785 4, /11/2010 3,000 4,000 5,000 10,752 13,658 9,408 2,636 5,551 2, /11/2010 2,500 4,500 5,000 9,543 11,167 9,839 2,715 6,627 3, /11/2010 3,000 4,000 5,000 6,617 6,958 8,240 3,116 4,423 4, /12/2010 2,000 4,000 5,000 6,718 6,713 8,717 2,000 4,000 5, /12/2010 2,000 4,000 5,000 8,840 7,571 8,053 2,000 5,579 4, /12/2010 2,000 4,000 5,000 5,806 7,389 6,129 3,511 4,000 3, /12/2010 2,000 3,000 4,000 6,909 5,672 5,388 3,774 3,797 1, /12/2010 1,500 1,500 2,000 5,222 3,946 3,615 2,342 1,775 2, Days 364 Days Source: Central Bank of Sri Lanka (a) Effect from May 3, 2002, government imposed a 10% withholding tax on interest of government securities. The rates quoted are net of this tax. Public Debt Management in Sri Lanka 79

90 Secondary Market Operations SECONDARY MARKET TRANSACTIONS as reported by Primary Dealers Table 26 Rs. million (a) 1. Outright Transactions 774, , ,672 1,200,537 1,356,110 1,743,780 1,449, Treasury bills Purchased 71,048 66,591 72, , , , ,902 Sold 311, , , , , , ,842 Total 382, , , , , , , Treasury bonds Purchased 171, , , , , , ,567 Sold 220, , , , , , ,079 Total 391, , , , ,692 1,007, , Repurchase Transactions 3,859,202 3,144,504 2,882,902 3,601,070 4,310,982 4,715,910 4,992, Treasury bills Repo 264, , , ,003 1,359,014 1,015,066 1,217,880 Reverse repo 557, , , , , , ,882 Total 822, , ,943 1,828,075 1,974,893 1,187,304 1,395, Treasury bonds Repo 2,176,654 1,257,020 1,194, ,251 1,442,266 2,757,851 2,877,407 Reverse repo 859,897 1,074, , , , , ,718 Total 3,036,551 2,331,648 1,977,959 1,772,995 2,336,089 3,528,606 3,597, Total Transactions 4,633,335 3,886,965 3,670,574 4,801,607 5,667,092 6,459,690 6,442,277 (a) Provisional Source: Central Bank of Sri Lanka Table 27 SECONDARY MARKET TRANSACTIONS RECORDED IN THE LANKASECURE (a) Rs. million Treasury bills 1.1. Outright Purchases / Sales 1,268,064 1,465,848 1,116,481 2,033, Repo / Rev. Repo 4,545,078 6,100,115 6,932,150 19,346,454 Total 5,813,143 7,565,962 8,048,631 21,379, Treasury bonds 2.1. Outright Purchases / Sales 1,124,076 1,592,460 2,125,035 1,974, Repo / Rev. Repo 5,371,166 8,404,308 10,368,869 17,896,054 Total 6,495,242 9,996,768 12,493,904 19,870, Total Transactions 12,308,384 17,562,730 20,542,535 41,250,022 (a) Note: - All transactions have been recorded in the LankaSecure System in Face Value basis. - Accuracy of the information is subject to the accuracy of the data recorded by the system participants in the LankaSecure System. Source: Central Bank of Sri Lanka 80 Public Debt Management in Sri Lanka

91 Public Debt Management in Sri Lanka 81

92 82 Public Debt Management in Sri Lanka