reason for the government to raise a
quick commercial loan at a high
interest rate was to dabble in further
corruption as reputed lending agencies
would insist on checks and balances in
granting loan facilities, alleges UNP
Assistant Secretary and Matara
District MP Sagala Ratnayaka. In an
interview with The Sunday Leader he
said the controversial US $ 500
million loan is not being opposed by
the UNP for political reasons but
because given the debt burden and the
displayed financial imprudence of the
government, no future government would
be able to pay such massive loans at
such high interest rates.
He added that
the loan if raised would create
conditions for the general public to
fall from the frying pan to the fire
as part of the conditions for granting
the loan is, serious cutting down of
subsidies including assistance to the
armed service personnel.
A former HSBC
employee, Ratnayaka said that the
commitment of commercial banking
institutions are to the shareholders
and warned borrowers should be mindful
of that fact. Excerpts:
Q: On what
grounds does the UNP oppose the US$
500 million bond to be raised by the
On the grounds that it is a short-term
commercial loan at a very high
interest rate. Besides, the reasons
given for raising this loan are
dubious. One such is infrastructure
development. No country develops her
infrastructure on high commercial
borrowing. Infrastructure needs are
catered to through development finance
or concessionary financing terms.
concern is the list of projects
submitted by the government to obtain
the loan. The proposal lists out three
power sector projects ó Norochcholai,
Kerawalapitiya and Trincomalee coal
power plants. The China EXIM Bank has
already agreed to finance Norochcholai
and laid foundation stones and spent
money on the tamasha. The project is
at a standstill. Why raise money for
If taken by
itself, Norochcholai alone requires US
$ 455 million. The list of projects
they have given, far exceeds the US$
500 million that they will be raising.
Kerawalapitiya, it was awarded to a
CEB owned subsidiary which is a
subsidiary of Lanka Transformers known
as Lak Dhanavi. It has already
raised the necessary funds through a
HSBC loan at much better terms than
what the government is getting on this
US $ 500 million bond.
government is likely to get LIBOR + 1
Ĺ or so on this and Kerawalapitiya,
according to what we know has got it
at LIBOR + .125% and have a longer
period for settlement than what the
government is getting on this
extravagant bond. Thatís why we find
it difficult to understand the reasons
for this loan.
If you take
into account the Central Bank
statistics, in its forecast for
disbursements this year in both
multilateral and bilateral loans, it
is stated that there is Rs. 1.64
billion forecast whereas actual
disbursement has been Rs. 295 million.
government is not making an effort or
is unable to settle the soft loans,
why raise more funds? All these lead
us to believe this is another very
Q: There is a
sense of urgency to raise this bond?
It may be
because concessionary loans do not
leave room for commission making. They
are usually monitored by institutions
like the ADB, IMF and the World Bank.
They also monitor financial
responsibility of a government and
leave no room for commission making.
This may be why there is such haste to
raise the bond.
Q: It is
understood that governments remains
bound by commitments made by
predecessors. How can the UNP threaten
not to honour financial commitments
made by this regime?
We have two issues. Has the government
sought parliamentary approval to raise
this loan? Public finance is
controlled by the legislature. If
there is no such approval, it is not
within the governmentís borrowing
economy is deteriorating so fast and
government borrowing has increased so
much in the current year. The
frightening part is there is a huge
portion of commercial debt at the
moment that no government coming in
the future will be able to repay this
loan. The country will go bankrupt.
already moving into a failed state
status and will not have the ability
to pay back. It is not just the UNP
government, any future government will
find it impossible to repay. Thatís
why we oppose this financial
the current debt structure, total
stock of external debt is US $ 11,000
million which is almost 45% of the
countryís GDP. If domestic debt is
also added, this will rise to 93% of
GDP. The estimated debt service
payment for 2007 is US $ 860 million.
debt repayment alone is about six
times our expenditure on education and
seven times on health. This is mere
capital expenditure excluding salaries
etc. If we keep increasing our
borrowings irresponsibly at a high
rate and irrationally on short term,
we are going to be hit by repayment
much faster. We will be committing
ourselves to something we cannot
position is, if the government has
already borrowed long term money for
projects, why borrow again?
government has agreed to pay this back
as a bullet payment. We have done some
workings on this. The bond is US $ 500
million. For easy conversion, say it
is Rs. 50,000 million. If we have to
pay back as a bullet repayment, one
should take into account at repayment
time both the interest and the rupee
is assuming a 5% per annum currency
depreciation of SLR/US $ over the
period of 10 years, in 2017 the Rs/$
exchange rate will be Rs.183 to the
dollar. Bond proceeds received in 2007
at current exchange rate of 112 will
be Rs. 56 billion.
repayment in 2017 in SLR at Rs. 183/$
will be Rs. 92 billon.
payable over the period at 7 % per
annum for 10 years ó in $ 350 million,
in Rs. 64 billion
repayment cost: Principal + Interest
in 2017 =
Nett cost to
the economy = Rs. 156 billion minus Rs.
56 billion = Rs. 100 billion
It is not
like a 40 year-long loan at a lower
rate. We do not wish to further burden
the public due to the folly of a
government that cannot handle the
economy and indulges in irrational
Q: But the
governmentís argument is that Sri
Lanka is now a middle-income level
country, which means loans at
concessionary levels, may not be
offered easily. So why criticise
We may have moved a slab. Yet, there
is a lot of aid and funding available
for countries like Sri Lanka should we
show commitment to the world that we
are on the right track. Resolving our
conflict is key.
When there is
a conflict in a country, it
immediately impacts on the economy.
Any lender, lending even on commercial
terms will build a risk premium. In
this US $ 500 million too, there is a
built in risk premium.
private bank will look into the aspect
of the conflict as well as the
economic policies of a country.
Do not forget
that development banks too have loans
at harder rates than concessionary
soft loans which offer much better
rates than commercial banks. These are
available, even if a country moves a
slab up. We should take available
steps than rush into commercial
government claims to borrow these
amounts for infrastructure but also
claims there is sufficient aid. Whatís
the plausible explanation here?
given by the government for this bond
as per its proposal is that Sri
Lankaís access to concessional
financing is insufficient. Second
reason is to achieve Mahinda
Randora to achieve rapid
infrastructure development. Third, to
extend the average maturity of GOSLís
commercial debt. Four, to discover
price for Sri Lanka bond. Five, to
fulfill an appetite for US denominated
already showed that the first claim,
that Sri Lankaís access to
concessionary financing is
insufficient is false. The Central
Bank forecast US $ 1. 64 billion in
soft loans for disbursement this year.
In fact only US$ 295 has been
When there is
long-term soft money available, why
borrow? It is a big lie contained in
have already listed 27 infrastructure
projects as the reason for borrowing.
Most for these already have their
funding raised through commercial or
soft loans. There is no donor for
Moragahakanda which has some
environmental issue to sort out. Then
there are tourist and investment zone
projects in Kalpitiya and Trincomalee.
They have not been discussed before.
Those are the only projects that have
not raised funds previously.
therefore questions the reason for
borrowing when there is soft money
undisbursed? When all these projects
have funds, why borrow for them at
is that the government is avoiding
reputed lending agencies for they deny
the opportunity to make thumping
commissions and would insist on close
scrutiny. This is another away to rob
government has gone on its knees to
borrow from these three commercial
banks and pledged to remove several
subsidies. The pledge is to bring down
subsidies from 5.8% of GDP to 3.9% GDP
in 2007 and 3.8% the year after.
In 2006, we
spent Rs 144 billion on subsidies
which included Rs. 58 billion on
pensions, Rs 14 million on Samurdhi,
Rs 12 billion on fertiliser and Rs. 9
billion on fuel. Some Rs. 39 billion
went for the transport sector like the
CGR and CTB. There were also subsidies
on school textbooks and assistance to
These are the
things the government has agreed to
cut down. When they cut the subsidies,
it will come down to Rs 126 billon,
some Rs 18 billion less.
To put things
in context, if you take current value,
Rs 18 billion is two times this yearís
If you take
inflation which is currently at 17%
and retain the value of the subsidies
at the same level as in 2006 assuming
inflation to be 15%, then the actual
spent on subsidies should increase to
Rs 166 billion and not decrease to Rs.
So in real
terms, the subsidy cut would be Rs. 40
billon, not Rs. 18 billion as
This will hit
the poorest of the poor, the very
people the Mahinda Chinthana
pledged to uplift. For example,
fertiliser was promised at Rs. 350 but
now sold at Rs 2,600. A further cut on
the subsidy would be unimaginable.
This will increase poverty.
quoted some workings as to how much we
will have to pay at the time of
repayment for the commercial loan. It
will amount to Rs.13,000 per citizen.
Even a day old baby will be paying
this. It is all right to pay some
taxes if that baby has a safe
environment to live in, has education,
infrastructure and growth opportunity.
It is all
right to pay some taxes but it is not
all right for people to pay these
loans back when they have not received
any benefits. While people receive
nothing, the Rajapakse brothers are
having larger houses not just here but
in various parts of the world. It is
palaces for the Rajapakses and wattle
and daub homes for others!
not be inclined to pay this Rs. 13,000
as this means having to support the
extravagances of this regime such as
paying for brand new Aston Martins, a
recent purchase of a VIP kid. He got
his super car when people cannot even
afford to travel by a
Q: You have
been a banker. How do you think this
kind of borrowing will impact on the
The US $ 500
million can immediately stabilise the
rupee. But it will be temporary and
completely artificial. Unless there
are steady economic policies and an
effort to resolve the conflict, the
benefit will be truly temporary. Our
debt will increase, the bullet
repayment will come soon. The economy
will be in a critical state. On the
long term, this is very detrimental.
Any steadying of the currency and a
reduction in inflation as a result
will be temporary.
Q: Do you
feel that this type of borrowing is
resorted to because there is a problem
in going before conventional lending
organisations that offer money tied to
Yes. They will not just insist on
pursuance of peace but on financial
responsibility and feasible projects.
No institution will lend to a country
which has a government that is not
steady in its thinking ó the
discrepancies, lack of respect for
international opinion, not to mention
the abuse of power and violation of
rights against this dyslexic regime.
sluggish growth, Central Bank Governor
Nivard Cabraal was quoted in Bloomberg
recently as having said that
"conditions can change overnight." How
possible is this?
can be changed overnight in certain
cases, but not in the current
backdrop. In 2001 when a Ranil
Wickremesinghe led government assumed
office, we changed conditions almost
overnight. We went from a negative
economy to a positive economy in a few
To be able to
do that, a government must have
vision, commitment and a capable team.
Instead, this regime has demonstrated
corruption, HR abuse and
Q: Also, does
this mean that a future UNP government
would abstain from high interest
commercial borrowing? Is the UNP able
to give a firm undertaking?
UNP during its two-year stint was
professional enough to convince the
aid group and qualified for massive
donor assistance. It came, linked to
the peace process.
with a protracted war progresses
economically. No other country will be
willing to pump their taxpayersí money
in to a country that will swallow it
up in an internal conflict either.
They want to
see us end the war or at least make a
genuine effort to resolve it. They saw
the UNP doing that. Hence the pledges.
We feel that
when we return to power, we would not
have to resort to irrational borrowing
Q: The HSBC
management in Colombo was recently
quoted as having said that the
proposed borrowings would "help
contain local rates and moderate
inflation." Any comment?
together with JP Morgan and Barclays
are listed in the US and UK Stock
Exchanges. Their only responsibility
is to their shareholders and that is
to maximise shareholder profit. It
cares not a bit about Sri Lanka.
means higher salaries even for the
local management. JP Morgan
specifically has a bad record in Sri
Lanka as it is dubiously linked to the
corrupt MiG transaction.
Q: While the
opposition may wish to remain
critical, doesnít a country also
require to meet eligibility criteria
for borrowing? Isnít that a plus for
different ways of assessing
eligibility. Sri Lanka has been rated
B+ by S & P. However, recently the S &
P worldwide chief was fired for
issuing inflated ratings which caused
concern to those who relied on such
ratings. It is likely that Sri Lanka
too got an inflated rating.
Also, a B+
rating is not investment grade. It is
only a speculative or junk bond
rating. Also, outlook is still not
positive but only stable.
main economic related reasons given
for this upgrading are two factors ó
the elimination of the oil subsidy
allowing full pass through of market
prices to the end consumer and
increases in electricity tariffs.
conflict, S & P has stated that the
nature of the conflict was helpful in
the upgrade but here again, the
thinking is that the war will
intensify with no real political
solution in sight.
On the other
hand, there are other eligibility
criteria. For example, the Millennium
Challenge Account (MCA) was created to
assist countries that are US friendly.
But to qualify, certain criteria had
to be met including good governance,
human rights, submit project proposals
for approval etc.
Minister Ranil Wickremesingheís
tenure, we qualified. We were about to
submit project proposals when
governments changed. The US $ 180
million grant was cancelled thereafter
as the new government failed to meet
the eligibility criteria.
Q: The rate
of inflation in August was 17%. What
basic steps would be required, in your
view, to contain that to about 10%?
spending has surged by 44% this year
and shows signs of further increase.
It is a key area that drives inflation
in Sri Lanka. Also the mismanagement
of the economy causes rupee
Peace in the
country is the most crucial
requirement to create conditions for
investment and to control inflation.
Q: The UNP is
poised to move a no faith motion
against the government. The issues
raised are about corruption,
extravagances, the US $ 500 million
loan and the withdrawal of subsidies.
How much of the economyís current
problems, in your view, get attributed
to government corruption? What
immediate steps does the UNP propose
to lighten the burden on the public?
economy is in the doldrums because of
mismanagement and corruption. When
corruption is involved in any
institution, the conditions are not
conducive for any party.
integrity is compromised quality gets
simultaneously compromised. As a
result, people get a raw deal today.
This government is the most corrupt
regime this country has seen so far.
They only think of the money when
Take the MiG
27 deal. There is 100% corruption
there. It is not a commission made on
a good purchase. These aircraft were
grounded soon after purchase. They
were rejected by the SLAF six years
ago but brought to Sri Lanka 25 years
after manufacture. Some 16 years have
lapsed since they were last grounded.
What is worse
still is that the payment has been
made despite having said it was a
to a non-existent company called
donít fly. They canít help us in the
war effort, soldiers canít get the
required support from this expensive
purchase and the countryís security is
badly selected too. The MiGs 27s are
only for ground attack purposes
whereas we should have selected multi
role aircraft. Itís not like making a
commission on a good deal. Here, we
have lost the money and lost out on a
good purchase. The burden of these
corrupt deals will be passed onto the
people through the new taxes.
As for the
second query, I can only say that the
UNPís immediate proposal is for all
parties who care for the country to
come forward to help form a government
that would be conducive to the people.
Only the UNP can provide the
leadership this country deserves.