Pakistani Banks In Sri Lanka Likely to Face Losses

Pakistani banks operating in Sri Lanka are likely to face losses due to the ongoing debt crisis of the host country.

MCB Bank and Habib Bank Limited are operating branches and operations in various cities of the country having investment in the debt securities issued by the government through the Central Bank of Sri Lanka.

According to a report issued by KTrade, these banks are expected to recognize impairment on foreign investment in the wake of the recent debt default crisis in Sri Lanka as the banks are having exposure in Sri Lankan debt securities from 3 to 6 percent.

MCB Bank made an investment of Rs. 8.3 billion in securities, HBL’s share stood at Rs. 8.02 billion and UBL’s investment parked at Rs. 9.02 billion in debt securities and bonds, the report said. The expected losses will impact negatively on the capital adequacy ratio of the banks and hurt the dividend payment capacity to the shareholders.

The banks may recover losses in case of support from any financial agency or institution but it will take time. Also, if there is a risk cover on this investment, Pakistani banks could prevent the losses.

In the worst scenario, banks might wind up their operations in the host country. The overall situation of business and operations has been upset in Sri Lanka

Sri Lanka defaulted on its foreign debts for the first time since its independence. Its foreign debt stood at a huge amount of $51 billion.

The residents of the country’s 22 million are facing crippling 12-hour power cuts, and an extreme scarcity of food, fuel, and other essential items such as medicines. Inflation is at an all-time high of 17.5 percent, with prices of food items available at an exorbitant cost.

Situation Analysis

The economic crisis in Sri Lanka seems to be worsening with the authorities announcing temporary default on its foreign debts. With more than $50 billion in external debt and foreign exchange reserves hovering around $1.9 billion (last month), the country is currently struggling to make payments on its international sovereign bonds. Media sources suggest this week that a $36 million interest payment is due on Sri Lanka’s 2023 dollar bond as well as $42.2 million on the 2028 note. Moreover, a $1 billion sovereign bond is maturing in July 2022.

The extraordinary measure taken by the Sri-Lankan authorities to halt payments on foreign debt is to preserve its dwindling reserves for the import of essentials such as food. fuel and medicine.

Going forward, market experts suggest the options available to the Sri-Lankan government include the negotiation of a settlement in which bondholders are given new bonds that are worthless but help provide some partial compensation or restructuring of the current one with the support of IMF which media sources claim to be the likely strategy of Sri Lanka.