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.
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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. |
