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 September 9, 2007  Volume 14, Issue 12


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The US$ 500 mn bond issue is suicidal for Sri Lanka


Sagala Ratnayaka

The only 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:

By Dilrukshi Handunnetti

Q: On what grounds does the UNP oppose the US$ 500 million bond to be raised by the government?

A: 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.

The other 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 it again?

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.

As for 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.

Also, the 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.

When the 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 corrupt transaction.

Q: There is a sense of urgency to raise this bond?

A: 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?

A: 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 rights.

Next, the 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.

We are 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 imprudence.

According to 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.

Our external 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 fulfill.

The UNP position is, if the government has already borrowed long term money for projects, why borrow again?

The 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 depreciation.

One example 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.

Principal repayment in 2017 in SLR at Rs. 183/$ will be Rs. 92 billon.

Interest payable over the period at 7 % per annum for 10 years ó in $ 350 million, in Rs. 64 billion

Total repayment cost: Principal + Interest in 2017 =

Rs. 156 billion

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 borrowing.

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 developmental borrowing?

A: 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.

Besides, any 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 borrowing.

Q: The government claims to borrow these amounts for infrastructure but also claims there is sufficient aid. Whatís the plausible explanation here?

A: One reason 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 GOSL bonds.

I have 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 disbursed.

When there is long-term soft money available, why borrow? It is a big lie contained in the proposals.

Then, they 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.

The UNP therefore questions the reason for borrowing when there is soft money undisbursed? When all these projects have funds, why borrow for them at commercial rates?

Our reading 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 the people.

Also, the 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 disabled soldiers.

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 fuel subsidy.

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. 126 billon.

So in real terms, the subsidy cut would be Rs. 40 billon, not Rs. 18 billion as projected.

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.

I earlier 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!

People will 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 bakki karatte.

Q: You have been a banker. How do you think this kind of borrowing will impact on the overall economy?

A: 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 peace?

A: 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.

Q: Despite sluggish growth, Central Bank Governor Nivard Cabraal was quoted in Bloomberg recently as having said that "conditions can change overnight." How possible is this?

A: Conditions 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 months.

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 mismanagement.

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?

A: The 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.

No country 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 like this.

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?

A: HSBC 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.

More profit 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 the government?

A: There are 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.

Among the 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.

On the 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.

During Prime 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%?

A: Military 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 depreciation.

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?

A: The 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.

When 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 pushing projects.

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 government-to-government transaction, to a non-existent company called Bellimissa.

The aircraft 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 at peril.

They were 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.

 

 


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