Sri Lanka can build more infrastructure with project specific bonds: rating expert

Feb 09, 2010 (LBO) – Sri Lanka should follow Malaysia’s example in selling project specific bonds for infrastructure, which will give confidence that money is not mis-directed and make it easier to tap money for capital investment, a senior financial expert said.

The island has under-invested in infrastructure for decades, leaving the country with weak infrastructure. This has reduced Sri Lanka capital output ratio to double that of developed countries, economists have said.

Sri Lanka now needs to invest five units of capital – a capital output ratio (ICOR) of 5.0 – to get one unit of output compared with 2.5 for the US and Western Europe and 3.0 for Japan, economist W A Wijewardene has said.

Sri Lanka has recently started raising money in international financial markets through sovereign bonds, ostensibly for infrastructure, but the government runs a deficit in the current account of its budget.

A current account deficit indicates that the state borrows to bridge its current spending. It has been the practice in Sri Lanka to cut capital spending in favour of politically important current spending.

Sometimes donor finance projects are delayed for lack of counterparty domestic funds.

However the most important factor in project speci