Govt. won’t stop foreign borrowings

‘SL obtained lowest interest rate for 10-year int’l sovereign bond May 15’



article_image

Central Bank Governor Arjuna Mahendran yesterday said that it would be in Sri Lanka’s economic interests to continue with government borrowings both onshore and offshore, in order to preserve the continued momentum of economic growth and to re-affirm the strong positive image in the minds of lending institutions that Sri Lanka was fast becoming a mature democracy where political events did not unduly affect the workings of her rapidly evolving economic structure.


The Governor was responding to our news report headlined ‘Halt foreign borrowings till polls are over – Opposition’ in yesterday’s edition of The Island on the basis of a statement made by Prof. Peiris.


UPFA MP Prof. G.L. Peiris called upon the government to refrain from taking any further action with regard to foreign borrowings until the conclusion of the August 17 election.


Prof G. L. Peiris, in a letter addressed to the Secretary to the Ministry of Finance and Governor of the Central Bank, on Tuesday asked them to "act in the best public interest and ensure that the management of public finance, the economy and external debt will not be permitted to get further deteriorated during the ensuing 6-8 weeks."


In reply to Prof. Peiris’ call to the government, the Governor has sent the following statement to The Island: "The Department of External Resources has solicited proposals on direct US Dollar term loans to the Government of Sri Lanka from reputed international financial institutions. These direct loans are expected to be contracted at, as the letter states much lower rates of interest than what the Treasury could reasonably obtain through the issuance of Sri Lanka sovereign bonds and thus save the Treasury considerable sums of money.


This is part of the strategy of the new Government to restrict foreign commercial borrowings to a prudent minimum while maintaining the lowest possible rate of interest. This is to ensure that the Rupee cost of servicing such Dollar borrowings remains manageable at a time when the US currency is appreciating strongly against major international currencies, including the Sri Lanka Rupee. At all times the Treasury and Central Bank have ensured that such external borrowings are well within the approved limits obtained from Parliament and the Cabinet of Ministers.


There is no sign that foreign lenders are under any pressure to charge higher rates of interest than normal at the present time. In fact the Government floated a 10-year International Sovereign Bond in May 2015 at a margin less that 4 per cent above the corresponding US Treasury Bond, the lowest interest margin ever obtained for such bond issuance by the Government of Sri Lanka.


It is even more remarkable that this low rate of borrowing was obtained even as a Group of UPFA MPs including the learned Professor stymied the passage of the Parliamentary Bill from the Minister of Finance to raise the limit on issuance of Treasury Bills. The consequent losses to the Government as a consequence of this action are running into several hundreds of billions of Rupees as the Treasury has to resort to higher-interest rate longer maturity issues of Bonds to finance government spending.


Proposals for the latest direct term loan were submitted by participating Banks well before the announcement of the dissolution of Parliament.


It is a curious assertion made that the prospect of General Election should create sub-optimal conditions for government borrowings from foreign banks. The onshore auctions of Treasury Bills and Bonds continue as normal and no drastic changes in interest rates have been registered in these markets even as they continue to attract record volumes of subscriptions, including onshore subscriptions to US Dollar denominated Sri Lanka Development Bonds.


Elections in a mature democracy like Sri Lanka are recognized, by international financial institutions, to be part of the normal course of the political process and it is unthinkable that they would in any way undermine the working of the economy. The economic policies of the new government have been re-oriented to promote more balanced economic growth with much less reliance on expensive commercial borrowings to finance infrastructure projects at inflated prices, as was the practice in the past 5 years. It can easily be seen that international lending institutions have applauded this change of economic strategy judging by the reduced rates of interest they are offering on loans to the Government of Sri Lanka.


There appears to be confusion in the mind of the learned Professor on the rate of economic growth. Despite the economy growing at 6.2% it is stated that the economy is contracting! The only major sub-sector that has contracted is that of seafood exports to the EU which was affected because of the lackadaisical attitude adopted by the Foreign Ministry to enforcing EU conditionality governing such exports, resulting in a ban on Sri Lanka seafood exports to the EU consequent to the learned Professor’s tenure as Minister of Foreign Affairs.


It can therefore be asserted that it is in Sri Lanka’s economic interests to continue with government borrowings both onshore and offshore, in order to preserve the continued momentum of economic growth and to re-affirm the strong positive image in the minds of lending institutions that Sri Lanka is fast becoming a mature democracy where political events do not unduly affect the workings of her rapidly evolving economic structure."


 
 
 
 
 
 
 
 
 
 
animated gif
Processing Request
Please Wait...