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Lanka bid to take costly loan flayed

world Updated: Sep 16, 2007 21:55 IST
PK Balachandran
PK Balachandran
Hindustan Times
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A leading Sri Lankan economist has joined the Leader of the Opposition, Ranil Wickremesinghe, in opposing the Mahinda Rajapksa government's bid to take an expensive and short term $500 million commercial loan to fund infrastructure projects when less expensive and long term loans, more suited to infrastructural projects, are available.

The Leader of the Opposition has threatened to cancel the loan if his party comes to power. He says it will cast a very heavy burden on the people, already subjected to a 17.5% inflation. And economist Dr Harsha de Silva of the Colombo-based think tank, LIRNE-Asia, has warned that Sri Lanka may become a defaulter if the government resorts to expensive borrowings for infrastructural projects with long gestation periods.

Sri Lanka's Central Bank had announced in early August, that it was going to raise $500 million through the sale of US dollar-denominated sovereign bonds on behalf of the government. The sale would be done by October 6, by HSBC Holdings, JP Morgan, and Barclays Capital, through road shows abroad.

"But given the present conditions in the debt market and the existing level of confidence in Sri Lanka, it is unlikely that the fund will be raised for less than 7 to 7.5%," Dr de Silva told Hindustan Times on Sunday.

"Another very important aspect of the bond issue is that the repayment is to be made in one bullet payment, which is a one-off payment of $500 million, with the interest being paid every six months," he pointed out.

"Compare this with loans Sri Lanka can get from ADB and other agencies. Funds from the ADB and the World Bank either attract no interest at all, or less than 1 to 2%. The repayment durations are in the region of 30 years, with grace periods extending up to 10 years. And the government has taken such loans for projects like the development of the Colombo South harbour," Dr de Silva said.

"It makes no sense to go for expensive short term loans for infrastructure projects when typically, these take several years to complete and may not yield revenue for a long time," he asserted.

FUNDS ARE AVAILABLE BUT UTILISATION IS POOR

Dr de Silva wonders why the government should go for this loan, when the international donors have already pledged $4.76 billion in concessional finance for infrastructural development. Up to June, only 18% of this had been disbursed. In addition to this, the international community had said in January 2007, that a further $ 4.5 billion would be in the pipeline for the next three years.

Therefore, Sri Lanka's problem is not availability of funds, but utilization. And utilization is poor for want of viable project proposals from the government.

There is a ticklish legal issue, which could stall the bid to issue the bond. According to Dr de Silva, the Sri Lankan parliament had said in 2003, that the government's public debt should not exceed 83% of the GDP. But the current debt is already 92% of the GDP.

Like other economists, Dr de Silva wonders if the real reason for going for the bond issue, despite trenchant public criticism, is to get funds for consumption or for military procurement or for the repayment of existing loans.