COLOMBO (Reuters) - An unidentified investor has promised to park $1 billion in dollar deposits in Sri Lanka to help the island nation defend its currency, the finance minister told Reuters, in an unusual move that highlights the country's precarious finances.
Finance Minister Ravi Karunanayake declined to reveal the identity of the investor. But he said the investor was Belgian and was working with a Sri Lankan partner.
The investor has promised to transfer the money in two equal tranches from banks in Brussels and Luxembourg, the minister said.
"Instead of going for bonds and other borrowing, we are permitting it to take place," Karunanayake said.
"This is better than negative returns in Europe", for investors, he said.
The deposits, which pay an interest rate of 2 percent, are part of the ministry's plans to raise $3 billion to $4 billion to shore up reserves and defend the rupee, which has hovered around record lows since the central bank floated it on Sept. 4.
Sri Lanka has run up a large budget deficit, forcing the government to borrow heavily and putting pressure on the rupee.
It is now also battling a growing balance-of-payments crisis.
Remittances from expatriate workers, worth about $5.8 billion in the first 10 months of last year, are expected to dry up because of the political turmoil in the Middle East.
Foreign reserves, which stood at $7.3 billion on Dec. 31, are under pressure as $5 billion is expected to be repaid on foreign loans in 2016, according to central bank data.
Financial experts said bringing in so much money from an individual investor was fraught with risks. Karunanayake has already liberalised dollar remittances from foreigners into the country. "This allows room for money-laundering. Black money could easily come through this," said Sirimal Abeyratne, an economics professor at the University of Colombo.
"Also, this money could go out quickly creating further volatility," Abeyratne said.
Karunanayake said anybody who felt black money was coming in could take up the matter in the courts.
A senior finance ministry official said it was the responsibility of the remitting bank in Europe to check the source of funds and know their customers.
"Sri Lanka will not question any investors who want to remit the money," the official said.
The first tranche of $500 million from the Sri Lankan investor's partner was deposited on Dec. 26, and the second is expected to arrive some time this month, Karunanayake said.
So far, the country has got $1.5 billion from such deposits, Karunanayake said.
He said the deposit has no lock-in period and the government would allow withdrawals at any time.
"This is to give confidence to the investors," Karunanayake said.
The money from the investor – and others - appears to have helped. Dealers said the central bank was selling dollars.
The Sri Lankan rupee closed steady at 143.75/85 to the dollar on Monday. It hit an all-time low of 144.30 hit on Dec. 30.
"What I feel is the authorities have the dollars to control the market since the last week of December," a currency dealer said.
(Editing by Paritosh Bansal, Robert Birsel)