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World Affairs



This is Paradise






  JVP sets stage for general strike

Borrowing spree continues

P. B. Jayasundera and
Ranjith Siyambalapitiya

By Mandana Ismail Abeywickrema

Amidst unstable economic conditions and warnings from credit rating agencies that the country was overly dependent on debt, the Government of Sri Lanka is continuing with its borrowing spree.

The Central Bank recently announced that the country had raised US$ 150 million through a syndicate loan arranged by Standard Chartered Bank.

The bank was awarded the deal on March 7. In April, Fitch Ratings downgraded Sri Lanka's sovereign ratings by a notch to B+ due to weak budgets, high inflation and heavy borrowing from foreign lenders at commercial rates. Standard & Poor's has given Sri Lanka a B+ rating with a 'negative outlook.'

A day after the Central Bank announcement was made on the US$150 million loan, it was reported that the country had also sought investors to buy US$ 200 million worth of bonds.

New instrument

According to the Central Bank, the new securities, known as Sri Lanka Development Bonds, will be offered in maturities ranging from two to five years to local and foreign investors.

It has been said that the proceeds from the offer will be used for development projects that would cover the health, road, airport, education and energy sectors.

The latest move to raise money is yet another borrowing spree by a government that is engaged in heavy defence expenditure. It is predicted that defence expenditure could rise to Rs. 200 billion in 2008.

The government was expected to spend a sum of Rs. 166 billion, which is Rs. 456 million (US$ 4 million) per day on defence and public security this year, which it has been pointed out is a huge amount for a lower middle-income country.

Over the budget

However, going by the earlier defence spending trend since 2006, the government's estimation of Rs. 166 billion for this year would undoubtedly be much higher by year end, especially after the events that have taken place, where for all intents and purposes it has been made clear by both parties full scale war is the only agenda.

According to analysts, if the additional costs such as pensions and disability expenditure on servicemen, and installment payments for military procurements are also taken into consideration, the defence expenditure for 2008 will exceed Rs. 200 billion.

Apart from the defence expenditure, the country is also battling skyrocketing inflation, which is at almost 27% according to a new index introduced to by the government. The new index was put in place of the previous Colombo Consumers' Price Index that recorded a nearly 30% inflation rate in April.

It is amidst all these unsavory conditions that the government has continued with debt-raising measures to fund domestic projects despite a recent warning by the International Monetary Fund (IMF) that it could be headed for a foreign debt crisis.

However, analysts feel that there is no need for the government to raise money in the foreign market given the fact that the country had almost US$ 4.7 billion committed and undisbursed funds for infrastructure projects. Ninety percent of the external borrowings carry a rate of 1.5% interest.

Better terms

"The issue is if there really is a necessity to borrow money three and half times more than the 1.5% rate offered to us. The money we already have is for a period of 25-30 years with a grace period of 10 years," analysts point out.

What is also ironic is that while the Rajapakse government borrows money for what many experts say is recurrent expenditure including salaries, the principal US$ 500 million obtained earlier will have to be repaid in one installment in a period of five years most likely by another government.

The government has also said that it would pay only the interest for five years. The interest will have to be paid once every six months and would come to a massive US$ 200 million.

Such is the repayment scheme of the initial US$ 500 million raised last year. Now with the recent borrowings added on, the country's loan burden would increase significantly with much pressure being placed on the already exhausted state coffers.

Trade deficit widens to US$ 2 billion

The country's trade deficit has widened to more than US$ 2 billion in the first four months of the year with oil imports erasing export gains.

According to Central Bank statistics, imports from January to April have increased to US$ 4.53 billion, up from US$ 3.29 billion in the corresponding period last year.

Exports have seen a marginal growth from US$ 2.23 billion to US$ 2.48 billion.

The bank has further said that despite the trade balance widening 92.4% in the first four months, the overall balance of payments have recorded a surplus of US$ 320 million dollars.

However, the manner in which the overall balance of payments improved has not been stated. Official sources have reportedly said that the better than expected foreign remittances from Sri Lankans migrant workers had seen a big inflow of foreign exchange into the country.

In May, the Central Bank said remittances increased by 23.5% to US$ 752.2 million for the three months to March this year.

The country purchased oil worth US$ 1.11 billion in the first four months of this year, which is a 76.3% increase from US$ 632 million spent in the corresponding period last year.

Nothing to worry says Minister

Finance and Revenue Minister Ranjith Siyambalapitiya says that there is no reason to worry about the foreign borrowings as the country has successfully managed to reduce its debt percentage as against GDP.

He said that the country's debt, which stood at 105% against GDP in 2003 has now been brought down to less than 90%.

According to Siyambalapitiya, the debt is expected to be reduced to 87% by the end of the year.

He said that there was no reason to worry about the borrowings as the country paid a similar amount back as debt repayment.

"There would not be any negative impact on the economy," Siyambalapitiya said, adding that the government had borrowed money solely for development work and not for consumption purposes.

BoC bad loans at Rs. 217 billion in '06

Parliament was informed last week that the total loan outstanding of Bank of Ceylon (BoC) has increased from Rs. 61.3 billion in 1996 to Rs. 217 billion in 2006.

Leader of the House, Minister Nimal Siripala De Silva disclosed the details to the House in response to an oral questioned raised by UNP Parliamentarian Ravi Karunanayake.

The Minister has said the outstanding loans have been increasing every year except in 2002 and 2003. Accordingly, the amount has reduced to Rs. 114.6 billion in 2002 compared to Rs. 142.5 billion in 2001 while it has further declined to Rs. 107.1 billion in 2003.

The outstanding loans have however started to increase from 2004 and has increased to Rs. 125 billion from Rs. 107 billion in the previous year.

The period of the loans vary from one to 180 months. The records of all loans are maintained until they are fully settled and for a further period of six months to one year, depending on the type of security. Thereafter, the security such as title deeds, registration of motor vehicles, insurance policies, deposit certificates etc. are released to the customers and other documents are destroyed as per the bank's archiving policy.

"Hence, at any given time the bank maintains the records of outstanding loans only," the Minister has said.

The loans that have been considered as bad debts have also been accumulating from 1996 to 2006. Accordingly, the amount has increased from Rs 10,727 million in 1996 to Rs 13,603 million in 2006. The total loans written off have been Rs 117 million in 1996 and Rs 70 million in 2003.


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