History of Ceylon Tea

• Russia key buyer of Sri Lanka tea exports; top tourism source
• Inflation is Asia’s fastest; 2030 dollar bond drops to record

With Covid shutting off tourism from much of the West, Russia and Ukraine had become an increasingly important source of foreign currency for Sri Lanka. The conflict threatens to turn off that tap as key bond repayments come due.

Almost a quarter of all tourist arrivals into Sri Lanka this year were from Russia and Ukraine -- rising to 30% if you include Poland and Belarus, official data show. Russia, which was the third-biggest buyer of Sri Lankan tea over the past two years, rose to second place in January.

While detailed breakups on spending aren’t yet available, tourism and tea earned Sri Lanka more than $260 million in foreign currency this year. Every dollar is important because the nation’s overall FX reserves fell 25% to $2.36 billion in January. Sri Lanka looks set to face a funding requirement of $5.7 billion in 2022, including the money needed to plug the current account deficit, according to estimates from Bloomberg Economics.

Much of the reserves stockpile comprises bilateral aid such as swap lines from China and India, and Sri Lanka was looking to boost non-debt flows. The island nation is already running Asia’s fastest inflation, and foreign investors are concerned that if Sri Lanka doesn’t restructure its overseas debt or devalue the rupee that is currently pegged to the dollar, it could miss repayments such as on a bond maturing in July.

“Balance of payments is the main issue, reserves are dwindling, the currency isn’t being allowed to adjust and if they avoid raising fuel prices then losses at the state-owned enterprises will mount,” said Kenneth Akintewe, head of Asian sovereign debt at abrdn. “Securing some source of foreign funding is even more urgently required now, but given the risk of fairly imminent default, that is easier said than done.”

The 5.875% bond maturing in July fell one cent to 74 cents on the dollar Monday, the lowest in more than a month. The 7.55% 2030 note dropped three cents over the past week to a record low of 46 cents on the dollar.