UPDATE 1-Sri Lanka extends currency controls, bonds under fire from critics

(Add details, quotes from fund managers, background)

By Marc Jones

LONDON, July 2 (Reuters) – Sri Lanka on Friday extended exchange controls for another six months as part of its latest attempt to preserve the country’s dwindling foreign exchange reserves.

The restrictions published in the country’s official gazette https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/laws/acts/en/dfe_gazette_20210702_2234_49_e.pdf, focus on limiting the amount in Sri dollars Lankans and local businesses are allowed to ship out of the country.

The restrictions come as concerns persist over the government’s ability to repay debts, despite regular assurances from ministers and officials.

Mixed with the current COVID-19 pandemic, apparent resistance to support from the International Monetary Fund, and uneven demand in recent local debt auctions, market pressure has intensified.

Friday was the worst day for the nation’s government debt markets since October, with a bond due for repayment next July falling more than 4 cents and a number of others falling between 2 and 4 cents.

“If Sri Lanka is to avoid default in the medium term, it needs an IMF program that will help anchor expectations of fiscal consolidation,” said Raza Agha, Head of Emerging Markets Credit Strategy at Legal & General Investment Management.

Ricardo Adrogue, head of Barings’ global sovereign debt and currencies group, added that it was encouraging to see the government appear determined not to default.

“It’s a big plus, but the (debt) numbers are telling, however,” noting how the country spent around 50% of government revenues on debt payment.

(Reporting by Marc Jones and Tom Arnold, editing by Karin Strohecker and Jonathan Oatis)

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