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COLOMBO: Sri Lanka will repay a $1 billion five-year sovereign bond due on Monday entirely from its reserves, central bank governor Indrajit Coomaraswamy said, after three of its state-run banks failed to raise funds from foreign sources.

The government is struggling to repay its foreign loans, with a record $5.9 billion due this year including $2.6 billion in the first three months alone.

Officials said a plan to raise funds through state banks for full repayment fell through because of poor investor appetite for further Sri Lankan debt, forcing the recourse to reserves.

Coomaraswamy said the loan was "being settled today." The country's foreign reserves stood at just $6.9 billion at the end of 2018, down from $7.9 billion in October before a political crisis that caused all three major ratings agencies to downgrade the country's debt.

Coomaraswmy said the $1 billion outflow from the reserves would be replenished with a combination of swaps, term loans and international sovereign bonds.

Investor confidence took a hit when President Maithripala Sirisena abruptly sacked Prime Minister Ranil Wickremesinghe in October and replaced him with pro-China former President Mahinda Rajapaksa and dissolved the parliament.

The country's top court ruled the parliament dissolution was illegal and Wickremesinghe was restored to power in December - but the seven-week-long crisis hurt the rupee and drove sovereign bond yields higher, straining government finances.

Copyright Reuters, 2019