Building a Greener Future: Why an Effective Sustainable Finance Landscape Matters

Building a Greener Future: Why an Effective Sustainable Finance Landscape Matters

 

The article named as, The Importance of the implementation of an Effective Sustainable Finance Landscape, on 11 June 2024 published by the DailyFT and signed by a DailyFT Contributor (PhD - MSU Malaysia; MBA; AIB, MCIM, PGDp, SLIM, Certify Lending IFS UK), informs and allows comprehension of an issue that can be called essential and it is associated with the implementation of the effective sustainable finance landscape. It focuses on incorporating Environmental, Social, and Governance (ESG) factors, Corporate Social Responsibility (CSR), and Sustainable and Responsible Investment (SRI) in the financial decisions regarding climate issues, higher transparency, and raising long-term capital funds to develop green economy and resilience.

The article picks up the fact that a powerful sustainable finance system is a pressing need to curb climate change, depletion of resources, and stability of economies posed by industrialization and globalization. Based on the World Meteorological Organization, it mentions that the deaths of almost 2 million people and losses to the economy of $4.3 trillion are attributed to climate and weather-based catastrophes between 1970 and 2021. ESG (Environmental, Social, and Governance), CSR, and Sustainable and Responsible Investment (SRI) bring environment and ethical frameworks to financial judgment, an approach called Sustainable finance. The article singles out the emergence of green bonds, sustainability-linked bonds, green banking, and circular economy financing as some of the emerging financial products to mobilize capital to promote sustainable economic growth.

It is important that Sri Lanka develops a sustainable finance environment that would secure its long-term economic resilience and systemic integration with the global capital markets. In the current volatile, uncertain, complex, and ambiguous (VUCA) world, the financial systems could not remain restricted within the use of conventional metrics such as revenue or profit. By integrating ESG factors into investment decision-making, financial intermediaries are likely to mitigate systematic risk, such as the risk of disruption due to the change in climate, reputational risk, and exposure to stranded assets and become aligned with the international expectations of investors.

To the financial markets in Sri Lanka, sustainable finance provides an avenue to streams of diversified capital inflow. The example of green bonds and sustainability-linked bonds sell renewable energy and sustainable transportation projects, as well as waste management, to institutional investors at home and abroad; they also open new sources of finance. Such capital flows will be able to reduce the interest rate on green projects, reinforce the green bond market in the country, and boost Sri Lanka as a respectable investment entity. Besides, the disclosure should be promoted, especially within such frameworks as Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB), since it helps to increase investor trust by mitigating the threat of information asymmetry and greenwashing.

But there are obstacles to the shift towards a strong sustainable finance system. Failure in progress is usually encountered by weak sustainable financial literacy among the stakeholders, limited appetite to risk, and uncertainty over risk-return trade-offs. Low operational costs, common to clean energy and circular economy projects, often work against them, as they end up paying over-priced credit risk because of insufficient data and the obsolescent credit rating practices. These distortions have the potential to limit the ability of capital to move toward sectors that are important in the climate transition and the economy of diversification in Sri Lanka. Also, there are risks of greenwashing by companies that overstate their environmental qualifications to acquire funding. To review these, there ought to be sustainability measurements that are quantifiable, measurable and separately audited that can help in the sustenance of the ESG markets.

Sustainable finance achieves greater goals of fiscal and monetary perspectives on a macroeconomic level. By investing the money into green infrastructure and energy-efficient projects, Sri Lanka will be able to skip its reliance on fossil fuel complaints thereby helping free up foreign exchange through its balance of payment. Besides, sustainable investments employ workers in new areas, ensuring inclusive growth and stable domestic consumption.

ESG investing momentum can be witnessed globally. The analysis conducted by BlackRock revealed that more than 80 percent of sustainable funds beat the conventional portfolios in the year 2020 due to the COVID-19 pandemic and thereby indicating that sustainable investments are capable of generating competitive returns despite disruption to the market. In the case of Sri Lanka, ESG factors are not a luxury to integrate into the financial systems of the country anymore but a condition of gaining access to global liquidity, achieving SDG-related financing goals, as well as being resilient to climate and economic shocks.

It needs a broad strategy which includes policies innovation, investor education and working together with multilateral forums such the UN Environment Programme Finance Initiative (UNEP FI) and the International Platform on Sustainable Finance (IPSF). In this way, Sri Lanka will be able to successfully mobilize capital, to preserve its environment, and achieve long-term sustainable growth.

Sustainable finance is critical in the stability of the Sri Lankan economy, system of sustainable environment and integration with the global economy. Greenwashing, risk mispricing, and low literacy rates are only some of the current obstacles, but with ESG, green bonds, and reporting frameworks the best-rewarded projects can have their capital mobilized. Sustainable investments are not only profitable but also resilient, meaning that Sri Lanka has to focus on the reinforcement of regulatory and market infrastructure as a means to introduce sustainability as a keyword in financial innovation and national prosperity.

Original post Link - https://www.ft.lk/financial-services/Importance-of-implementing-effective-sustainable-finance-landscape/42-762891

Author - Nehan Chamod

 

 

• Title of the article: The Desirability of Domestic Debt Restructuring

• Source: Verité Research
• Date published: 13/09/2025
• Link to the original article: https://www.veriteresearch.org/wp-content/uploads/2022/10/VR_EN_BN_Oct2022_Desirability-of-Domestic-Debt-Restructuring.pdf?

Restructuring of the domestic debt

      This is a very important process that Sri Lanka must go through to ensure that its economy is stable and healthy again. Sri Lanka is steering through one of the worst economy crises of its history with an alarming rate of debt-to-GDP ratio of approximately 121%. The foreign and domestic debt of government has led the country to the verge of financial collapses. Though there has been much emphasis on international debt restructuring, the much ignored but equally important restructuring of domestic debt is central to restoring macroeconomic stability, fiscal sustainability, and fair growth.

What is Domestic Debt Restructuring (DDR)?

The restructuring of domestic debt is a renegotiation of the terms of government debt owed to local creditors, such as the extension of maturity dates, or the repricing of interest rates or rescheduling of payments. This is in contrast with external debt restructuring which involves foreign creditors.

The domestic debt which is mainly in Sri Lankan rupees is currently approximately 59 percent of the overall public debt in Sri Lanka. The problem is in high interest rates (usually over 20 percent), the increase in debt stock through refinancing at high yield and the effect this has had on local financial institutions which are much exposed to government securities.

The Reason why Sri Lanka needs DDR?

• Improving Debt Sustainability:

 Studies indicate that restructuring of the external debt will not suffice, unless there is domestic debt restructuring, the debt to GDP ratio could increase to 139 percent within the next ten years. The extension of maturity of domestic Treasury Bonds at no reduction in the coupon can work the ratio to approximately 103, which is a much better and more manageable number.

• Macroeconomic Stability and Inflation:

The high interest rates on debt rollover stimulates the inflation and money growth. DDR would assist in lowering the cost of government borrowing, decreasing inflation rates, which are currently standing at more than 60 per cent and stabilizing the rupee.

• Strengthening Financial Institutions:

Sri Lankan banks and pension funds are heavily dependent on coupon income on domestic government bonds and therefore coupon reductions are not desirable because they provide a risk to the stability of the financial sector. The DDR strategies prefer to roll over maturities with regulatory cover to soften this shift.

• Prevention of Future Debt Crises:

It is common to see countries go through various debt restructurings unless fiscal discipline and credible policy frameworks are put in place. DDR can establish fiscal buffers to Sri Lanka to better absorb external shocks and minimize the probability of recurrence of crisis.

• Justice in the allocation of the crisis expenses:

 DDR provides a more specific and equitable solution to the reduction of the debt burden of the government than either increasing taxes or inflation which impact more on the middle and lower-income group.

Recent Developments and Government Measures

The Sri Lankan government has also been keen on negotiation with local creditors to agree on new repayment conditions and also attempting to restructure its external debts. Multilateral organizations such as the International Monetary Fund (IMF) also stress on DDR and reforms as a key to the sustainable recovery.

Based on the current research and findings:

• The government suggests the extension of the maturity of domestic Treasury Bonds to 10 years (reprofiling) without a decrease in coupons or the principal.
• The financial states of the banking sector and other financial institutions will need recapitalization assistance in the process.
• The success of the restructuring will rely on transparency and fair participation of the creditors.
• DDR will be needed in order to ensure that IMF standards are met and investor confidence is restored.

Global Context and Lessons:

Sri Lanka is not the only country that has been pursuing its domestic debt restructuring. To different extents, maturity extensions, coupon cuts, and face value haircuts have been utilized by countries like Greece, Barbados, Jamaica and Cyprus.

 Effective restructurings make it a rule not to include short-term treasury bills as this will cause market disruption.

Deep face value depreciation increases net present value (NPV) losses but could be required based on the state of the economy.

Challenges and Risks:

• DDR may request domestic creditors to suffer losses, and this will ultimately affect the country on its own.

• The DDR plan proposed by the government is expected to cut down debt servicing payments by approximately 1.5 percent of the GDP, whereas the IMF estimates higher cuts (approximately 15 percent) to make the fiscal sustainable.

• Maintaining the inflation regulation plus monetary growth to finance debt repayments is a complicated issue and demands both the fiscal and monetary policies.

 Conclusion

 A Path Forward Sri Lanka has a twin deficit issue, i.e. a fiscal deficit and, a current account deficit, which have been heavily financed by domestic debt. Devoid of restructuring this domestic debt and external restructuring, there is the risk of the country sliding into years of financial turmoil, inflation, and recurring debt crises. Restructuring of domestic debt through maturity extension and favorable financial sector interventions provides an effective route through which the economy can be brought to its senses and confidence is rebuilt and recovery is enhanced in an equitable manner. This process must be transparent, involve creditors and be accompanied by structural reforms to guarantee long-term sustainability. This is a hard road to go through, and with extensive DDR and profound reforms, Sri Lanka will be able to recover a strong economy that will be able to grow and flourish.

Sri Lanka’s Forex Surge: Trends and Risks

Introduction

A recent article published by Economynext on August 31, 2025, reported a surprising development in Sri Lanka’s economy. The country recorded a $729 million foreign exchange surplus in July, driven by goods exports of $1.3 billion, remittance inflows of $690 million, and tourism income of $318 million. These figures seem to demonstrate resilience in Sri Lanka’s external sector. Exports are growing strongly, incomes from migrant workers remain strong, and tourism is becoming a more stable form of income. But there are also some risks that should be brought up with this news that should not be ignored. Rising imports, the increase in private credit, and controversial policy decisions of the Central Bank raise questions about the viability of this surplus. As seen by Sri Lanka's difficulties following its 2022 debt default, these short-term gains could become risks if not managed carefully.

Understanding the Inflows

Sri Lanka’s forex growth in July was caused by three main income categories: exports, remittances, and services (including tourism). Exports of goods reached their highest monthly level ever, stimulated by demand ahead of the Trump administration’s new tariff system in the U.S., which was set to take place in August. Remittances increased to $690 million, led by higher contributions from the country’s overseas workforce, while tourism and other services income increased to $618 million.

These inflows give firms and individuals more purchasing power. They also contribute to improving Sri Lanka’s overall balance of payments account by supporting the current account. But the reality is that increased inflows often end up resulting in increased outflows. The demand for imported goods and services tends to increase when there is more money available. Spending on traveling abroad increased to $81 million in July from just $55 million the previous year, while spending on imports increased in several areas. This shows a continuing problem where inflows increase confidence and provide temporary restoration, only to be offset by increasing imports, causing a medium-term burden on reserves.

The Rising Credit Problem

The most worrying issue is the rapid growth of private credit. In June alone, private credit increased by Rs. 221 billion, the highest in recent history. Although easy credit is frequently regarded as a booster for investment and consumption, in Sri Lanka, it mostly results in increasing imports. Imports related to investment, which included construction materials, machinery, and automobiles, increased to $446 million in July 2025. This was the highest level since January 2022, just before the economy plunged into its worst balance of payments crisis in decades. The pattern is apparent because excessive credit growth increases demand for imports, which in turn reduces reserves and worsens the trade deficit. In the last currency crisis, Sri Lanka banned car imports to manage its external position; however, even without cars, total imports still exceeded $2 billion. These policy failures are a reminder of the consequences of disregarding classical economic principles.

Risks of Rate Cuts 

Recent policy decisions taken by the Central Bank of Sri Lanka (CBSL) have complicated the situation. The decision of lower policy rates and using a single policy rate framework has been criticized by analysts. Even small reductions in rates suggest a favorable monetary policy at a time when private lending is already expanding. Banks are less motivated to invest in government securities like Treasury bills and bonds when interest rates are lower. Rather, banks are more likely to increase their loans to the private sector, which will further increase demand for imports. This puts strain on reserves, because more money is being spent on imports rather than saved to pay off external debt.

Conclusion

Sri Lanka’s July forex surplus presents a positive image, but it conceals more serious concerns. High exports, remittances, and tourism earnings show resilience, but rising private credit, surging imports, and lowering interest rates risk sustainability. If reserves are not managed carefully and policy regulations are not controlled, current inflows might turn into a future crisis. For Sri Lanka, the real challenge will be how CBSL and policymakers manage growth without compromising stability. Avoiding the current progress from turning into a future crisis is crucial to ensure a sustained recovery and restore investor confidence.

References

https://economynext.com/sri-lanka-foreign-exchange-earnings-2-6bn-in-july-exceeds-imports-by-729mn-238818/

https://www.cbsl.gov.lk/en/news/external-sector-performance-july-2025

https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/press_20250829_external_sector_performance_july_2025_e.pdf

 

Written by,

Devni Weeramuni (236136B)

Sri Lanka's Export Growth

 Sri Lanka's Export Growth: A Turning Point for the Economy

The foreign exchange and jobs earned by the Sri Lankan economy have been heavily relying on the export sector. The country is on good progress, after years of struggle to recover, the nation is now presenting good recovery signals in 2025, with exports recorded 15.37 percent higher in July than it was in the same month of last year. This expansion was largely fuelled by tea, coconut-derived goods, clothing, and rubber - time-honored staples of the economy of Sri Lanka.

But what is the implication of this for the overall economic path of the country? To come up with the importance of this increase, it is worthwhile looking at the position of the exports of Sri Lanka in the past and why the exports have faltered, and what the country stands to gain upon this recovery. A Brief Look at Sri Lanka's Past Export Performance.

A Brief Look at Sri Lanka's Past Performance

The export history in Sri Lanka has always been associated with a handful of commodities. During the decades, tea, rubber, and coconut products constituted the main part of the income. More recently, the biggest contributor to export revenue was apparel and textiles, with hundreds of thousands of workers and the influx of much-needed foreign exchange.

Nevertheless, the growth in exports in the past ten years was usually below expectations. Sri Lanka experienced one of the most difficult economic crises of its history between 2019-2022. Export income was pulled down by some factors during this period:

1. Economic Crisis & Debt Burden (2019-2022) - The nation experienced a serious balance of payment crisis, and foreign reserves were being drained. This brought challenges to the imports of raw materials required in industries such as apparel and food processing, which directly impacted production and exports.

2. COVID-19 Pandemic (2020-2021) - The pandemic has interrupted the global supply chains. Factories in Sri Lanka shut down temporarily, the routes to various countries slowed down, and the non-essential goods could be demanded in the world market. The tourism sector failed and exports became one of the least lifelines of foreign income.

3. Farming exports - Major export products such as tea and spices were impacted by low production, climate change issues, and a miscalculated policy (such as the sudden fertilizer ban in 2021). This led to agricultural exports experiencing great declines in the same years.

4. Political Instability - Santos and trade partners were not convinced in the face of political instability in Sri Lanka in 2022, and it was more difficult to grow exports.

Due to these factors, there were low export earnings compared to the potential in Sri Lanka in the past. Indicatively, in 2022, merchandise exports were about 13 billion USD per year, around a range of 15-16 billion USD.

Signs of Recovery: The Situation Now

Go ahead to 2025, the export sector in Sri Lanka is back on its feet with fresh vigor. The numbers of July 2025 are especially promising:

• Total exports increased by 15.37 per cent. to attain 1.3 billion USD in a month.
• Tea sales increased by 13.09 percent, which indicated the product was still being wanted worldwide by Ceylon Tea.
• Coconut products were up by a whopping 63.85 percent, indicating that Sri Lanka can diversify its offerings to value-added products such as coconut oil, coir, and activated carbon.
• Export of apparel increased by 8.15 percent even as the world faced uncertainties and threats of tariffs by the US.
• Seafood and ornamental fish skyrocketed, increasing the 78.17 and 148.97, respectively, with references to the emerging chances in the in-store export markets.
• The industrial exports of rubber, rubber products increased 10.10 percent, and this indicates a stable situation.
• Seafood and ornamental fish skyrocketed, increasing the 78.17 and 148.97, respectively, with reference to the emerging chances in the in-store export markets.
• The industrial exports of rubber, rubber products increased by 10.10 percent, and this indicates a stable situation.

Most industries experienced growth, but spices and essential oils experienced a drastic fall, especially pepper exports, which were reduced by more than 81 percent. This still is an issue, but growth in other sectors has made it more than offset the loss.

Moreover, the two largest export markets of Sri Lanka, the United States and India, also strengthened. The US increased by 2.64 percent and India increased by 28.87 percent, overtaking the United Kingdom as the second-largest destination.

Why Exports Are Rising Again

The recent increase in export earnings can be explained by several facts:

1. Policy Stability - Unlike the crisis, Sri Lanka has succeeded in stabilizing its foreign reserves and providing exporters with a more predictable policy environment, years.

2. Global Demand Recovery -The orders of Sri Lanka have increased due to the aftermath of the pandemic and the increased demand for the necessary products such as food, beverages, and textiles.

3. Diversification into New Products -Examples of how Sri Lanka is no longer just depending on tea and apparel include coconut products, seafood, and ornamental fish exports.

4. Better Access to Raw Materials Industries have an ease of access to raw materials as there are fewer import restrictions and there is a better availability of foreign exchange, which facilitates easy production.

5. Good Trade Relations with Major Partners- Sri Lanka has embarked on establishing good trade ties with India, the US, among other markets, hence Sri Lanka has been assured of stable demand in its exports even with uncertainty in the world.

Advantages of an Increase in Exports to Sri Lanka.

Its increase in exports is not merely a matter of numbers; it has several long-term positive effects on the economy and society in Sri Lanka:

1. Foreign Exchange Earnings - The increase in exports earns the country precious dollars, and thus it manages to stabilize its local currency and eliminate foreign debt.

2. Employment Opportunities - The apparel sector alone has employed hundreds of thousands of Sri Lankans, the majority being women. The increased demand for exports is equal to the increased number of jobs and income security.

3. Industrial Development - Bigger industries such as coconut-based products, seafood, and rubber promote value-added production, where Sri Lanka is no longer expanding on exporting raw but instead on higher value production.

4. Economic Stability - A well-developed export industry will decrease the dependency on borrowing and provide a stable stream of revenue, and will decrease the possibility of future economic meltdowns.

5. Enhanced International Image - With Sri Lanka on its feet again, the capacity to satisfy the demand of the international community will restore investor confidence and empower the trade partners of the country.

Looking Ahead

The export performance of Sri Lanka in July 2025 is an optimistic recovery and strength indicator. Although difficulties still exist, especially in agricultural exports such as spices, the general development indicates that the country is moving in the right direction than during the years of crisis.

Sri Lanka will have to:

• Invest in the new agricultural technology to stabilize exports of spices.
• Promote innovation and technology in such areas of industry as apparel and coconut products.
• Expand into new markets beyond the US, India, and Europe.
• The stability of policies should be assured to prevent scaring away exporters.

With these measures in place, the export sector in Sri Lanka can still expand, offering an excellent platform through which the nation can recover economically.

Conclusion

The 15.37 percent increase in exports in July 2025 is not just a one-month miracle by Sri Lanka, but a picture of the resilience of people and industries amidst the economic setbacks that the country has experienced over the years. The export industry which was previously exporting tea and apparel to seafood and coconut products is once again proving to be a savior in the nation.

Provided that the right policies are adopted, Sri Lanka is set to enjoy long-term stability, which will ensure the state has a brighter economic future.

Reference-https://economynext.com/sri-lanka-exports-rise-15-37-pct-in-july-helped-by-tea-coconut-rubber-and-apparel-238231/

Written By Sawmiya.

Index no- 236120V

Sri Lanka’s Debt Restructuring

Sri Lanka 's economic crisis which was running through 2022 -23 can be indicated as a one of the most highlighted scenarios in its history. The severe status of Sri Lankan economy could be observed by the fuel shortages, power cuts and spiraling inflation which drove the economy beyond its limits through unsustainable debt and fiscal mismanagement. However, the economy is recovering slowly with the process of debt restructuring and reforms of IMF.

How did Sri Lanka Get here?

This debt crisis is not an overnight incident. Various factors paved the way to the confusion that the Sri Lanka has faced.

Rising Public Debt: Debt Levels were Around 128% of GDP by 2022

Foreign reserves decrements: With the effect of COVID 19 the tourism was severely collapsed, declining of remittances, and rigidity of exchange rates deplete the reserves.

Policy missteps: In 2019 the tax was suddenly cut which caused to reduce government revenue and the risk of repayment increased as the reliance on external commercial borrowing.

Global shocks: Situation was even worsened with the rising of oil prices and disruptions of supply chain.

The Restructuring Breakthrough

Milestone is December 2024 when Sri Lanka successfully restructured US$ 12.55 billion in foreign debt. In this restructuring process specific financial tools were used:

• Governance linked bonds (GLBs): this was designed to reward Sri Lanka economic transparency  and     effectiveness by reducing interest rates on debts.
•  Macro -Linked Bonds (MLBs): processing repayment terms to macro-economic performance in   Sri  Lanka which creates flexibility during falls.

As a key scenario we can indicate which was occurred in March 2025, when Japan agreed to restructure US$ 2.5 billion in debt, with repayments stretched from 2028 to 2042. This incident effected advantageous to Sri Lanka as it hopes to improve credit ratings and confidence of the investors was renewed.

  IMF's Crucial Role

This is a topic where we cannot neglect without discussing as it is tightly linked with the turnaround of Sri Lanka as it provides the Extended Fund Facility.Us$3 billion facility (2023-2027): Provides staged disbursement tied to reforms.

By July 2025, Sri Lanka had already drawn Us$ 1.74 billion having the most IMF reviews.

Reforms are compromised with energy pricing adjustments, governance reforms and tax mobilization to boost state revenue. Other creditors and markets are received strong signals because of this IMF's continued support.

Debt Structure in 2025

Burden if Sri Lanka's debt is heavy even after restructuring.

As of 2025:

• External debt(50%):  multilateral institutions, bilateral creditors, commercial bondholders.
• Domestic debt(65%): High interest payments affects to government finances.

In 2025, 13% of the GDP was indicated for debt services, but the restructuring has reduced the repayment stress.

Signs of Recovery 

Economic Growth: GDP rebounded around 5% in 2024 which was led by the tourism and manufacturing after the 2022 contracting.

Inflation: In February 2025 inflation has turned into negative (-4.2%) which has dropped notably.

Credit Ratings: According to the Fitch ratings Sri Lanka has upgraded to CCC+, and the Moody's kept the Sri Lanka in rate Caa1 which is stable; still it's risky although it is a step forward.

Challenges Despite the Progress

• Domestic debt large proportion: Sri Lanka still has a large share with banks and pension funds.
• Revenue Generation: Collection of tax remains weak.
• External shocks: Global trade decrement, higher oil prices.
• Political risks

Conclusion:

A Turning Point, but not the Finish Line.

Both the risks of unsustainable borrowing and the opportunities of reforms are reflected by the Sri Lanka's journey through default in 2022 to the recovery in 2025.With the support of IMF the secured restructuring deals led to economy to show signs of recovery and also, we have a second chance.

References

IMF Press Release (July 3 2025)

https://www.reuters.com/markets/rates-bonds/sri-lankas-ambitious-governance-macro-linked-bonds-2024-12-17/

https://en.wikipedia.org/wiki/History_of_Sri_Lanka_%281948%E2%80%93present%29?

IMF Staff Country Report (2023)

Published by,

D.M.P.G. Bandara

      

Navigating The World of Debt: An Introduction to Financial Instruments

Title:- Navigating The World of Debt: An Introduction to Financial Instruments

Sources:- CBSL, World Bank

Date of Published:- 17/08/2025

 

What is Debt?

Debt is a powerful financial tool that allows individuals and companies to raise funds for various purposes such as financing operations, investments or managing liquidity needs. When you take out a loan, you borrow money with promise to repay it over a specified period of time, usually with interest. Debt securities are a type of financial instruments that represents a loan made by an investor to a borrower, such as a company or government. These securities include a wide range of products from short-term loans to long-term bonds.

Let’s recognize Short-Term Debt Instruments,

A short-term debt instruments are loans and other financial instruments that companies use to obtain funds for a period of up to One year. They are often used to finance working capital needs, manage liquidity needs or cash flow mismatches and purchase inventory or stocks. Intermediate and direct short-term sources of funds used businesses are bank overdrafts, commercial bills, promissory Notes and certificates of deposit.

·        Overdrafts: This is a major source of short-term financing. It allows a company to put its operating account into a deficit(overdraft) up to a pre-negotiated limit with the bank. Interest is charged on the daily debit balance in arrears on the monthly basis and is based on a margin above a ‘Reference rate’ such as the Bank’s prime rate. It is a very flexible funding option as the bank can draw cheques against the overdraft without further notice.

·         Commercial Bills: These provide funding for normal business transactions and are typically issued with a maturity of 30 to 180 days. A distinguishing feature is that a bank can also become an ‘Acceptor’, assuming prime responsibility for payment on maturity, thereby increasing its credit standing.

·        Promissory Notes(P-Notes): Generally referred to as commercial paper, these are discount securities that do not have an acceptor, making them ’one-name paper’. The credit status of the note is therefore entirely dependent on the issuer’s creditworthiness. Issuers may use a credit rating agency to establish the creditworthiness of the notes. P-Notes have an active secondary market.

·        Negotiable Certificates of Deposit(CD’s): Banks issues these to raise short-term funds in the money market. CDs are also discount securities with a maturity range of up to 180 days and have an active secondary market.

Let’s recognize Medium to Long-Term Debt Instruments,

These general credit facilities are used to raise funds for business borrowers over a long period of time. They are usually used for specific purposes such as financing building or equipment. These too can be identified in several types.

·     Term Loan: This is a specific amount of funds lent for a specified period, typically ranging from 3 to 15 years. Interest rates may be fixed or variable at a margin above a reference rate. These loans often include loan covenants which are conditions designed to project the leader. A positive covenant may require the borrower to take certain actions such as maintaining a minimum level of working capital. A negative covenant restricts the borrower’s activities and financial structure, for example, by limiting the amount of dividend or setting a maximum debt-to-equity ratio. Breach of a covenant may result in a default of the loan contract. Repayment may be interest-only, fully amortized or deferred.

·      Mortgage Finance: This is a loan secured by real property and it’s used for both residential and commercial purposes. Residential loans typically range up to 30 years, while commercial loans are generally range up to 10 years. Installments are generally fully amortized, but interest only commercial mortgage loans are available.

·      Corporate Bonds: These are debt securities issued in the corporate bond market. Borrowers are riskier than lending indirectly through intermediaries but can earn a greater return since they share in the profit margin usually taken by intermediaries. Types of corporate Bonds;

1.      Debentures: A debenture refers to a bond of a company with a security attached to it, for instance, a fixed and floating charge over the issuing company’s assets. Debentures typically rank higher over a company’s assets than unsecured notes in the event of liquidation.

2.      Unsecured Notes: These are corporate bonds issues that are not secured with a higher level of risk attached to them, hence a higher cost of borrowing. They are usually issued only by firms with a good credit rating, well established.

 

The current situation in Sri Lanka, which is burdened by Global Debt ;

Sri Lanka has also experienced a serious economic crisis, which ran deep into its debt profile. Its debt crisis resulted in default on foreign debt, causing difficulties for both the private sector and the government to borrow money in the international capital markets. This increased the risk perception of Sri Lankan borrowers, perhaps with a perspective of charging higher interest rates and stricter lending conditions.

For a Sri Lankan company, it may be very difficult to obtain a term loan or mortgage financing at this time. The Central Bank of Sri Lanka has, in certain cases, pursued tight monetary policies in order to stem high inflation. The policies have resulted in a sudden increase in interest rates charged on local currency loans. This directly impacts the cash flow and profitability of a business, with the monthly payment on a loan for equipment like new machinery far higher than it was just a few years ago.

This situation highlights the importance of knowing different instruments of debt and their details since the capital market can drastically alter the borrow ability and capital cost for companies. Such loan covenants and clear repayment conditions become all the more critical to lenders as well as borrowers in such an unstable market. The local market, like banks and institutional investors, plays a crucial role as far as providing the necessary capital is concerned, but debt cost and availability are greatly influenced by the Central Bank's policy.

These are some trusted sources from Sri Lanka for more information:

• ·   Central Bank of Sri Lanka (CBSL): For official monetary policy reviews and financial statistics. [https://www.cbsl.gov.lk/en/monetary-policy]
• ·   Ministry of Finance, Economic Stabilization and National Policies: For public debt summaries and fiscal policy information. [https://www.treasury.gov.lk/news/article/102]
• ·   Colombo Stock Exchange (CSE): For information on corporate bonds and other listed debt securities. [https://www.cse.lk/]
• ·   World Bank: For reports and press releases on Sri Lanka's economic outlook. [https://www.worldbank.org/en/news/press-release/2022/04/13/sri-lanka-faces-unsustainable debt-and-balance-of-payment-challenges]
• ·   Gateway House: For a detailed analysis of the causes and lessons from Sri Lanka's debt default. [https://www.gatewayhouse.in/lessons-sri-lanka-default/]

 

Author : Ridmee Amarathunga