Foreign banks lend dollars to Sri Lanka govt. at lower rates than locals

December 26, (LBO) – Sri Lanka has raised 100 million dollar syndicated loan from the international banks at a lower rate than previous dollar bond issues in the domestic market, the government’s debt office said. The loan came at a price of 75 basis points above the London Interbank Offered Rate (LIBOR) and the total cost to the government was 103.5 basis points, Department of Public Debt said.

Better Rate

The Citigroup acted as the facility agent for the 3-year syndicated loan, which was signed on December 14 with the funds coming on December 21.

Earlier in the year government issued dollar bonds to local banks and qualified investors at rates of 120 – 140 basis points above LIBOR.

In 2005 the government had raised 100 million dollars through a 3-year syndicated loan at a slightly lower cost of 95 basis points above LIBOR.

Banks from the Middle East and Asia had participated in the syndication.

“The successful conclusion of this transaction at this rate of interest reflects the confidence of foreign investors on the Sri Lankan economy,” the Department of Public Debt said in a statement.

“The loan proceeds will be utilised to meet the general development expenditures including infrastructure projects. It will also help to further stabilize domestic interest rates since these funds were raised in the international market,” the statement added.

Debt Warning

The practice of raising dollar bond to bridge the deficit has drawn criticism from the main opposition in Sri Lanka, saying the country was resorting to expensive short term commercial borrowing because it was not able to qualify for cheaper support from development partners due weaknesses in economic policy.

The International Monetary Fund also cautioned against short term dollar borrowing which has risen to over 1.2 billion dollars saying ‘lumpy’ repayments could push up debt service pressure.

Though lower deficits promised in the future by the government would reduce pressure in the medium term, IMF said in the near term debt-service-to-exports was expected to rise following the repayment of tsunami debt relief and ‘rollover of foreign currency commercial liabilities of the public sector of relatively short (2–3 years) maturity.’

“While the debt service to exports ratio is below the indicative threshold for debt distress
countries, its rapid increase, lumpy payment schedule, and high rollover risk is worrisome as it places significant liquidity pressures on the public sector balance sheet and increases the vulnerability of the debt dynamics to shocks,” IMF said.

The report was released last week, just days before the Fund said it was closing its office in Sri Lanka.

In 2004 Sri Lanka jettisoned an IMF and World Bank backed recovery plan and embarked on a domestically development policy agenda of low interest rates and heavy central bank borrowing.

Monetization Shock

By the end of the year the country narrowly averted a balance of payments crisis with tsunami aid and IMF emergency support.

Since mid-2006 the rupee has again come under pressure, in the face of renewed central bank credit (printing money or debt monetization) and dollar borrowings from domestic and foreign sources have helped stem the loss of reserves.

Standard and Poors which has rated the country B + with a negative outlook affirmed the rating last week, but also warned of debt sustainability risks the tendency of the government to plug holes in the budget with printed money (debt monetization), which destabilized the external sector and pushed inflation up.

“Sri Lanka’s revenue and expenditure rigidities prevent a more robust pace of fiscal consolidation, which is needed for improved debt sustainability,” S & P said.

“The attendant fiscal gaps in turn fuel the inflationary impetus via the government’s partial monetisation of its deficits.”

In November inflation rose to 19.8 percent and the rupee fell below 108 to the dollar after central bank credit rose to a record, 108.6 billion rupees in October.