CASE STUDYWorld Bank supports crisis-hit Sri Lanka’s efforts
to reduce interest rate risk on its loans
During the unprecedented economic crisisin Sri Lanka, the World Bank Treasury
helped to manage interest rate exposure on
outstanding IBRD/IDA loans of USD 712
million. Leveraging World Bank’s market
expertise, Sri Lanka was able to convert
interest rates from floating to fixed atcompetitive terms on 11 loans for present
value savings of approximately USD 38
million on estimated future interestpayments.

How did the World Bank Treasury
support Sri Lanka?
••••••

Providing training on financial risk management
instruments and preparation for London Interbank
Offered Rate (LIBOR) transition.
Analysing and sharing market projections forinterest rates to support the Ministry of Finance(MoF) in their internal discussions.
Providing alternative risk management tools
such as (i) full interest rate conversion; partial
interest rate conversion, short vs. long term
maturity, (cap and collar options to limit interest ratevariability). 1
Converting 11 loans with a total of USD 712 million
from variable reference rates to fixed reference
rates at competitive financing terms.
Ensuring the conversion was administratively
cost-effective as an embedded feature of the loanagreement.
Executing interest rate swaps with market
counterparties to match the fixing of the reference
rate with Sri Lanka and hedge IBRD’s interest raterisk exposure.

March 21, 2022, Colombo, Western Province, Sri Lanka: People stand in a longqueue to buy kerosene oil to use in their homes, at a fuel station in Colombo . The
island has been severely hit by the lack of foreign exchange, resulting in severe
shortages in food, fuel and imported goods. Photo Credit: Pradeep
Dambarage/ZUMA Press Wirefiscal deficit, and the Sri Lankan Rupee devalued byalmost 80 percent. Sri Lanka’s tourism revenues
collapsed amid the COVID-19 pandemic. The RussiaUkraine War and associated sanctions, which sent
commodity prices skyrocketing, exerted furtherpressure on the external sector.
Sri Lankans suffered shortages of fuel, electricity, andeven some essential food items. Import of goods washampered because of the critically low level of foreign
reserves. This caused dramatic price increases andignited mass public protests, resulting in theappointment of a new President in July.
Against this backdrop, the Ministry of Finance (MoF)
consulted with the World Bank Treasury about ways toprotect public finances against the impact of increasing
international interest rates.

Sri Lanka’s crisis:
Sri Lanka has been mired in economic turmoil anddeclared an external debt suspension in April 2022. The
Government’s unsustainable policy decisions andsignificant balance of payments challenges led to a
deterioration of welfare and food security. Inflation
soared as the Central Bank printed money to cover the1Caps set an upper limit on the variable interest rate of the loan. Collars set an upper limit (a cap) and a lower limit (a floor) on the interest rate of the loan.

CASE STUDYWorld Bank rate conversions
removed uncertainty
Understanding financial risks
The World Bank Treasury provides advisory services tomitigate financial risks such as interest rate andrefinancing risks and build capacity for clients.
Sri Lankan MoF staff received training from the WorldBank on the mitigation of interest rate risks due to theimpending transition of the London Interbank Offered
Rate (LIBOR) to new reference rates. They also received
a second training on comprehensive financial risk andliquidity management.
As all the financial market indicators were projecting asurge in interest rates for the year ahead, Sri Lankan
MoF wanted to protect the budget against interest ratevolatility. They wanted to be able to plan for future cash
flows.

of USD 712 million and a remaining weighted average
repayment maturity of 12 years. This generated apotential present value savings of approximately USD 38
million on the estimated future interest payments (as ofend of December 2022). 2 But more importantly, amid
economic, political, and social unrest, the MoF resolutely
focused on understanding and managing financial
market risks and protected the budget.
The World Bank Treasury helps clients manageinterest rate and currency risks in their debt
portfolios by sharing over 70 years of capital
markets experience, using the flexibility of the IBRD
loans, and executing hedges on non-IBRD exposures.

11 LOANS CONVERTED

For a total amount of USD 712 million

POTENTIAL SAVINGUSD 38 MM

During 2022, MoF constantly monitored the cost and riskof fixing the interest rate of their World Bank loans.
World Bank Treasury provided quotes on different
conversion options such as (i) full interest rate
conversion; partial interest rate conversion, short vs.
long term maturity, (cap and collar options to limit
interest rate variability).

Potential net present value savings on futureinterest payments of approximately USD 38 MM2(details in footnote)

Potentially saved millions

ADVISORY

In June 2022, Sri Lanka finally fixed the interest rate of
11 of its disbursed and closed loans for a total amount“The example of Sri Lanka has once more proven thesignificance of managing financial risks. Governments
must understand financial risks and mitigate them toavoid potential impacts on the economy and society. I am
pleased that, with World Bank Treasury’s support, SriLankan Debt Management Office strengthened its
capacity and protected a portion of its budget.”Chiyo Kanda
Country Manager for Maldives and Sri Lanka

CAPACITY BUILDING

on the mitigation of financial risks to Sri Lanka’s
public Debt Management OfficePreparations for the LIBOR transition andanalysis of market trends for interest rates“Amid economic, political, and social unrest, the SriLankan Ministry of Finance remained focused on its goal
to reduce interest rate risk and improve fiscal stability.
We supported their efforts by providing targetedtraining advisory and transactions execution.”

Miguel Navarro
Manager, Financial Products, Treasury

Contact: Miguel Navarro-Martin, Manager, Financial Products & Client Solutions, The World Bank Treasury
 mnavarromartin@worldbank.org  +1 (202) 458 4722
1225 Connecticut Avenue NW, Washington, D.C., 20433, U.S.A.

2The potential savings are based on the estimated interest to be paid over the life of the loans (based on Bloomberg forward rates as of December 30th, 2022). The
actual savings at final maturity may be higher or lower depending on the reference rate trajectory.