Sri Lanka’s central bank says the banking system is stable

Sri Lanka’s state-owned banks are functioning well and the banking system is stable, the island nation’s central bank said on Thursday, in response to concerns raised by an opposition lawmaker.

Sri Lanka is facing an economic crisis as it struggles to pay for essential food and fuel imports after a 70% drop in foreign exchange reserves since January 2020 led to a devaluation of the currency and efforts to seek help from global lenders.

“The Ministry of Finance and the Central Bank of Sri Lanka wish to assure the public and all other stakeholders that the banking system is stable,” the central bank said in a statement.

The operations of the state banks went smoothly, contrary to claims to the contrary, he added.

Thursday’s remarks in parliament came against the backdrop of about $1.4 billion in Sri Lanka development bonds set to mature this year, more than two-thirds of that before March, with domestic banks holding about 89 %, according to central bank data.

Three sources familiar with the matter said the central bank missed a payment on a Sri Lanka Development Bond (SLDB) owed to the People’s Bank, the main public lender, which in turn failed to honor a swap made with two other commercial banks.

The amount of SLDB’s payment was unclear.

The sources declined to be identified as the issue is sensitive.

The central bank did not immediately respond to a request for comment.

The opposition has learned that a state bank has defaulted, senior opposition MP Harsha de Silva told parliament on Thursday.

“There must be an immediate investigation into this,” he said, adding that he warned parliament against trading with negative premiums in a speech three months ago.

“I warned that it was dangerous and could lead to the collapse of the entire banking system.”

However, one of the sources said that the two commercial banks stepped in to help the People’s Bank by agreeing to defer settlement of the swap as they had enough dollars at the moment.

The People’s Bank had made it clear in a SWIFT transaction that the payment could not be honored, the source added.

“The size of the SLDB doesn’t matter,” said another source.

“The responsibility lies with the government, so it could have a cascading effect on the whole banking sector. That’s why they’re trying to minimize the damage.”

(Additional reporting by Swati Bhat; Editing by Clarence Fernandez)

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