Sri Lanka breaks ‘radio silence’ over sovereign bond

Sept 29, 2007 (LBO) – The controversy over a sovereign bond took a new turn with Sri Lanka’s finance ministry saying the country’s president could approve any foreign borrowing, in a statement sent to selected local media. Questions had also been raised about the timing of the issue, in the light of turmoil in global markets. Breaking the ‘radio silence’ held over the issue so far, including the US bank JPMorgan, the finance ministry said the bond would not be publicly sold in the United States, but the government intended to go ahead with the issuance.

Sri Lanka’s main opposition United National Party (UNP) had insisted that finance is a function of Parliament and not the Executive and has also attacked the government over the way funds have been used to start a new bank and an airline.

UNP leader Ranil Wickremesinghe has said that the sovereign bond would not be repaid by a future government headed by his party because it was not approved by parliament and it also helped the government flout a fiscal responsibility law.

Executive Approval

However Sri Lanka’s finance ministry said the government had the authority to issue the bond.

It said the gross borrowing approved by the parliament was 655 billion rupees for 2007, and the proposed 500 million dollar bond issue was within the overall limit.

“Further, the Foreign Loans Act empowers the President of the country to approve any foreign borrowing and those conditions also have been diligently adhered to,” the Finance Ministry said in the statement.

Sri Lanka’s current finance minister is the country’s president.

When a former president first started the practice, it drew fire from political analysts for undermining the checks and balances between Parliament and the Executive as the country lacks a finance minister that is accountable to the people.

The opposition had also charged that the projects for which the funds were allegedly being raised were already financed by other donors according to previous government claims.

“The Government intends to use the proceeds of the bond offering to supplement available concessionary funds to develop infrastructure projects that have previously been approved by the Government and included in the 2007 Budget,” the finance ministry said.

The ministry said the projects would push, reduce poverty and be a benchmark for private firms to tap international markets and that countries such as Indonesia, Philippines, Thailand, Vietnam and Pakistan have borrowed from international investors.

The ministry said the lead managers and bookrunners to the issuance, Barclays Capital, HSBC and JPMorgan were selected by the Monetary Board of Sri Lanka’s central bank after evaluating local and international proposals.

Sri Lanka’s opposition and the ant-graft watchdog Transparency International have called for the selection criteria to be made public and explain why other bidders were rejected.

Not in America

Sri Lanka said the bonds would not be sold in the United States and it had not been registered with the US Securities Act of 1933.

The US law has tough provisions for foreign governments raising money in that country.

Section 7 of the US law says that a foreign government has to file “specific purposes in detail and the approximate amounts to be devoted to such purposes, so far as determinable, for which the security to be offered is to supply funds, and if the funds are to be raised in part from other sources, the amounts thereof and the sources thereof.”

A legal opinion with “all laws, decrees, ordinances, or other acts of Government under which the issue of such security has been authorized,” also has to be filed. The names of the “counsel who have passed upon the legality of the issue” were also needed.

Lawyers from the issue managers were in Sri Lanka earlier in the month to conduct legal due diligence, however the outcome of the examination has not yet been made public.

Sri Lankan authorities were earlier hoping to diversify the investors who bought Sri Lankan securities from the traditional East Asian and Middle Eastern clients.

The move was expected to open doors for Sri Lankan companies also to tap such markets.