Bank of Ceylon may double foreign loans to boost Sri Lanka’s balance of payments

June 22, 2006 (LBO) – The Bank of Ceylon is to increase foreign borrowings to 400 million dollars this year, to boost Sri Lanka’s balance of payments and give more fiscal space for the government, a senior government source said. The bank has already called for proposals from foreign banks to raise 200 million dollars through a syndicated loan.

Treasury Secretary P B Jayasundera said Tuesday that he does not expect ‘dramatic pressure’ on the rupee while signing a 20 million dollar loan agreement with Korea to build an administrative complex and convention centre in Hambantota.

Sri Lanka has seen a net foreign reserve outflow in May with the government starting to pay for subsidies with central bank credit.

But last week the central bank raised policy rates by 25 basis points, and the government has also cut some energy subsidies, while stepping up the drive to raise more dollars.

With a previous plan to float a 7-year billion dollar sovereign bond now being shelved, the government is going for other ways to bridge the external resources gap.

The Bank of Ceylon, a state-owned commercial bank, has become an important source of dollar funding to the government during the last two years.


NRFC Borrowings by GOSL


2001


US $ 300 mn


2002


US $ 306 mn


2003


US $ 304 mn


2004


US $ 300 mn


2005


US $ 715 mn


(Source : Central Bank)

It not only borrows dollars in international markets and re-lends to the government but also channels remittances deposited in the foreign currency banking units to the treasury.

During 2005 alone, the bank is believed to have given fresh loans or rolled over about 685 million dollars worth of credit to the government at rates ranging from 1.95 percent to 1.65 percent. Loans worth 275 million dollars have to be re-financed or repaid this year with a 50 million dollar loan due in June and a 130 million and 95 million dollar loan due on September 15 and 18, market sources said.

About 40 percent of Bank of Ceylon’s 300 odd billion rupee asset base has been lent to the government.

Meanwhile, the roll-over of a development bond issue also closed on Tuesday, allowing the government to borrow dollars at much lower rates than before.

The oversubscribed issue closed with the government accepting bids for 300 million dollars of 2 and 3-year bonds at rates between 130 to 140 basis points above the 6-month London Inter-bank Offered Rate.

Six-month LIBOR current trades at 5.55 percent.

This was much lower rate than the 250 million dollars of maturing development bonds the government raised in 2004, at rates between 182 to 163 basis points above LIBOR.

The bonds were already trading in the secondary market at a premium of around 150 basis points dealers said.