No commercial foreign borrowings next year

Budget 2013:

* Little room for lower interest rates as country grapples with trust deficit, warn experts

The government proposes not to go for any foreign commercial borrowings next year, according to the 2013 budget, but domestic non bank borrowings will surge in order to finance a growing fiscal deficit leaving little room for monetary policy easing next year as the country continues to grapple with a trust deficit, experts warned.

According to 2013 budget proposals the government will not seek foreign commercial loans next year after borrowing Rs. 109.5 billion in 2011 and Rs. 128 billion in 2012.

With the budget deficit estimated at Rs. 507.4 billion next year, the government hopes to raise Rs. 86 billion from foreign sources to finance the deficit, a sharp decline from Rs. 205.6 billion estimated for this year, while domestic borrowings are estimated at Rs. 421.4 billion, almost doubling from 259.6 billion in 2012.

Non bank domestic borrowings are expected to carry the weight of the deficit, surging to Rs. 289.4 billion next year from 84.6 billion this year.

"Non bank borrowings will be high next year. This means more funds would be mobilised by selling Treasury bills and bonds to the public and borrowing from EPF, NSB and Sri Lanka Insurance," Institute of Policy Studies Executive Director Dr. Saman Kelegama said, addressing a post budget seminar organised by the Sri Lanka Economic Association and Alumni Association of the University of Peradeniya (Colombo Branch) earlier this week.

"For such borrowings to be effective interest rates would have to be attractive and this, among other factors, implies there is limited space for a reduction in policy interest rates," he said.

Dr. Kelegama also pointed out there was limited headroom for additional commercial borrowings from abroad to boost investment and growth.

"Public debt as a percentage of GDP may have declined from 80 percent to 78 percent in 2012, but the stock of foreign debt in total public debt has increased from 7.3 percent in 2003 to 37.5 percent in 2010, thereby raising risks associated with the economy. The share of commercial debt in total public debt has also increased. Within that, the external short-term debt has increased. As a result, despite the decline in the stock of government debt as a percentage of GDP, the external debt service ratio is heading in a risky direction," Dr. Kelegama said.

The government’s fiscal policy is under strain this year because authorities failed to take early action to rectify a balance of payments problem last year.

The budget deficit for the first eight months of this year reached 6 percent of GDP, the full year target being 6.2 percent.

The budget for this year had estimated the government’s debt requirement for 2012 was Rs. 776.2 billion from domestic sources and Rs. 327.8 billion from external sources. However, by end July 2012, the domestic debt component grew by Rs. 381.6 billion from end December 2011 while foreign debt surged to Rs. 646 billion.

Tax expert N. R. Gajendran addressing the seminar said Sri Lanka’s biggest challenge was bridging a trust deficit.

"The problem is not with the revenue deficit. It’s not the budget deficit. It’s not the trade deficit. It’s not the balance of payments deficit. The problem we have is the trust deficit.

"After three years since the war ended, and with foreign investors fleeing US and European markets, we have not been able to attract enough FDIs. Investors are pulling their monies from Switzerland and going to Singapore. We might miss this bus," Gajendran warned.

FDI inflows were estimated at US$ 2 billion this year, but for the first six months of this year inflows amounted to less than US$ 500 million and official estimates have been revised downwards to between US$ 1 to 1.5 billion.

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