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

Sri Lanka’s Rupee Holds Steady as Bond Yields Remain Flat -What Does It Signal for Markets?

Title : Sri Lanka’s Rupee Holds Steady as Bond Yields Remain Flat -What Does It Signal for Markets?

Source : Economynext

Publication date : July 24, 2025

Original article link : Economynext news article link 

The article called Sri Lanka Rupee Flat against dollar, bonds steady, written by the EconomyNext Newsroom on July 24, 2025, and published by EconomyNext reveals the stability of the Sri Lankan rupee at 301.80/85 per US dollar spot market, as well as the steadiness of the government bond yields of different maturities at the trading session.

In the spot market, on Thursday rupee was at the same level as it was in the previous trading session, at 301.80/85 to a US dollar. Market dealers said government bond yields were relatively unchanged with an odd bump here and there in fortune on the maturity scale. The 2026 and 2032 bonds maintained the yields at 8.10/20 percent and 10.40/50 percent, respectively and the 2027 and 2029 bonds declined slightly, closing at 8.48/58 percent and 9.48/55 percent. The sustained stability is an indication of low-key trading activities and a complacent market mood as investors evaluate the current fiscal and monetary policy position of Sri Lanka in the face of regional and global uncertainties.

The stability in the rupee and government bond market of Sri Lanka indicates that the country is at a state of tentative balance in its financial system in the sense that the currency level and interest rates are well in check. The spot market rate of 301.80/85 to US dollar is an indication that the recent fluctuations have halted probably due to the efforts in foreign exchange interventions made by the central bank of Sri Lanka and the inflow of remittance and tourism income taking place in peak travel months. It is critical to keep this rate high to keep imports affordable, the stability of debt service to maintain foreign investor confidence particularly as Sri Lanka transverses her debt restructuring commitments.

The yield published by the bond data is also useful in terms of market expectations. The short-term (2026 at 8.10/20 percent) and long-term (2032 at 10.40/50 percent) flat yields warrant the feeling of security on the part of investors about the near-term sustainability of government finances, whereas the minor declines in the mid-term yields (2027 and 2029) demonstrate the inflationary pressure expectations or possibly a tightening by the Central Bank. The yields are within the expectations of institutional investors such as banks and pension funds, and this prompts more investment in government securities markets which remain the mainstays of domestic debt financing.

At the macro level, a stable currency and a stable bond return promptly lowers the danger of capital flight and speculative trading. The stability will ensure that Sri Lanka improves its credit profile, especially when dealing with the multilateral lending institutions or offer sovereign bonds in the international markets. The reduced volatility also helps the corporate sector with lowered cost of borrowing funds and better forecasting experience in input dependent industries and will gradually result in a more predictable enabling environment with investments.

Nevertheless, there are hidden dangers behind the seemingly smooth situation. The stability of the rupee is perhaps not all natural, as it may only be because of manipulation by the Central Bank and non-market growing tendencies. In case of aggressive use of foreign reserves as a currency defense mechanism, it may result in vulnerability of balance of payments, particularly when export revenues or foreign direct investment (FDI) inflows are still sluggish. On the same breath, steady bond yield may indicate investor confidence, just as an indication of dreary credit demand in the private sector, which means economic recovery is slow, as borrowing demand is low even though rates have normalized.

Sri Lanka is also suffering with its debt sustainability concerns. There are high levels of external repayment requirements and dependence on the domestic debt markets which makes any change in global sentiment of risk (including a rate hike by the US Federal Reserve or an increase in oil prices) are likely to put pressure on the rupee and cause yields to rise rapidly. Sluggish fiscal reforms may lead to loss of confidence by investors, which would cause capital to outflow and depreciation of the exchange rate, and this calm will turn back in the other direction.

Making aside, the stability in the market provides policy makers with a breathing space at present. The government should use this breathing space to improve its fiscal position by increasing revenue mobilization, expenditure control and diversification of its exports to ensure that the stability of the currency and bond markets is maintained without undue interference in the market. By not taking these precautions, the present calm can prove to be a pause in trends, and not the permanent one.

The stable yield of Sri Lankan bonds and flat rupee movement indicate the precarious balance position in the financial markets of Sri Lanka providing the short: term solution and stability. Although this stability can generate confidence in investors and make us succeed in managing our debts easier, it is vulnerable, depending on both the policy discipline and worldwide circumstances. It is through this window that Sri Lanka will have to build foreign reserves, diversify exports and continue fiscal reforms making sure that everything is kept on its feet in an organic manner but not only through intervention.

Author : Nehan Chamod

 

 

 

 

 

 

 

Fourth IMF Review Completed – Sri Lanka Gains More Support.

• Title of the article: IMF Executive Board Completes the Fourth Review Under the Extended Fund Facility with Sri Lanka 

• Source: CBSL
• Date published: 03/07/2025
• Link to the original article:   press_20250703_completion_of_the_fourth_review_under_the_IMF_EFF_e.pdf

 

 What is international monetary fund?

      

International Monetary Fund (IMF)  is an intergovernmental financial institution that enhances the economic growth in the world, and ensures employment growth, international monetary cooperation, the global monetary stability, international trade and works to alleviate global poverty.

How Did the IMF Get Involved in Sri Lanka?

Over the past years, Sri Lanka had to go through one of the most severe economic crises ever in the country. This happened mainly due to the constant decline of foreign reserves in the country over the years. As a result, this led to a stagnation in international trade which affected domestic business operations. With the lack of foreign reserves, Sri Lanka announced to postpone their payment to international debt. In 2022, the total public debt level was around 120% of the nation’s GDP. Some side effects of this event are as follow.

• High inflation – Headline inflation was around 60% during the time. Prices of food, fuel and energy were off the charts.
• Depreciation of Foreign Exchange – The Sri Lankan Rupee was significantly depreciated against the USD, tightening international transactions.    
• Rise in Unemployment – Business operations were stalled, resulting labor cuts to minimize business operations

In a bid to come out of this predicament, Sri Lanka sought assistance of the IMF in 2022. In March 2023, a four-year IMF support program was approved, which is known as the Extended Fund Facility (EFF). The aim of the program is to assist in economic reform, sustainable debt financing and to facilitate price stability.

What is EFF?

EFF is an abbreviation of Extended Fund Facility. It is the kind of financial support that is issued by the IMF in aid of nations that are economically challenged. The EFF is intended to assist the countries which are in need of long term solutions to structural problems such as large debt, stagnant economic growth, inflation or imbalance of payment problems.

In the Sri Lankan case, the EFF program was commenced in March 2023, this is a 4 years agreement of USD 3 billion. It is concerned with:

·       Balancing of economy

·       Restructuring debt

·      Enhancement of financial discipline    

International Monetary Fund (IMF) has also finished the Fourth Review of the Extended Fund Facility (EFF) of 48 months by Sri Lanka and forthwith 254 million (about 350 million USD) is disbursed in Special Drawing Rights (SDRs). This fifth tranche brings Sri Lanka total amounts under the arrangement to SDR 1.27 billion (around USD 1.74 billion) and is the first since the start of the package in March 2023 to assist the country in its recovery and reform.

What is happening in Sri Lanka?

In general, the situation is moving in the right direction. The IMF has achieved most of the economic goals that it had projected. Inflation is under control and reserves are also increasing. Reforms in pricing of electricity were done. Almost restructuring of debt is completed. However, a small issue arose when incorrect data regarding overdue payments (arrears) was mistakenly provided to the IMF. Fortunately, this was not international but rather a result of miscommunication between government departments. The IMF trusted Sri Lankas version of the story and provided them with a waiver, meaning the  country  will not be penalized for the error.

What was proposed by the IMF?

This is what IMF would like Sri Lanka to do:

•  Collect more  money - enhance tax and eliminate unwarranted exemptions.
•  Help the poor in a better way- target and streamline the social programs.
•   Spend wisely , particularly on development projects.
•   Electricity pricing needs to be feasible - no more losses on the government.
•   Make the Central Bank independent (then inflation will remain low).
•   Complete debt agreements as soon as possible.
•  Enhance state of  government banks and development of the private sector.

 Personal view

After reading the IMF press release from July 3, 2025, I feel that Sri Lanka is finally making real progress. The approval of another USD 350 million under the EFF shows that reforms are working, even though challenges remain.

It’s encouraging to see improvements in areas like inflation control and tax revenue, as well as steps toward restructuring electricity pricing and public finances. I was slightly concerned about the incorrect data reported to the IMF, but I’m glad the government corrected it quickly and worked transparently.

To me, this program is more than just foreign funding .It’s about changing how we manage our economy. If we stay on track with reforms, support the poor, and complete debt restructuring, Sri Lanka has a strong chance of building a better, more stable future.

Written by, Pathum Dilhara (236088D)