Sri Lanka plans fresh round of US$ 250 mn commercial borrowing this year

The Sri Lankan government is planning a fresh round of US$ 250 million commercial dollar borrowing this year to plug gaps in the budget without putting too much pressure on domestic markets. The Sri Lankan government is planning a fresh round of US$ 250 million commercial dollar borrowing this year to plug gaps in the budget without putting too much pressure on domestic markets. Treasury Secretary P B Jayasundera said the Sri Lanka will have to go towards commercial funding with rising per capital income putting concessionary borrowings out of the country’s reach.

The Central Bank said Friday per capita GDP crept upto US$ 1,025 in 2004. But similar arguments were put forward in the late 90’s when the government forced to go to for commercial borrowings.

But critics say Sri Lanka is finding it increasingly difficult to fund the budget with soft loans because it does not have a credible economic programme to convince donors.

Sri Lanka’s Central Bank which functions as the agent for placing debt, said the upcoming bond issue of between US$ 150 million to US$ 250 million will generate greater demand from neighbouring Bangladesh.

“The government is looking at raising between 150 to 250 million dollars for reconstruction work. There is also lot of interest from commercial banks in Bangladesh for our paper, this issue should be hopefully attractive enough for them,” Central Bank’s Deputy Governor W A Wijewardene said Friday.

The bonds will again carry a two-year maturity like the previous year’s issue for US$ 350 million.

Previous issues, Sri Lanka Development Bonds, attracted some interests from foreign nationals, and Wijewardene says branches of foreign banks operating in Sri Lanka have helped promote the development bonds.

Of Sri Lanka’s 21 commercial banks, eight are branches of foreign banks like HSBC, Citigroup and Standard Chartered Bank.

The Central Bank has not yet fixed the spread the bonds will pay over the six-month London Interbank Offered Rate (LIBOR) but expects to pay less than the average 200 basis point differential it forked out last time because US interest rates, albeit rising, are now lower than they were then.

Bankers widely anticipate the premium to be at 150 basis points.

But eagerness for yield and dearth of US dollar debt from the unrated Sri Lanka notwithstanding, there are still many concerns about the country as an investment destination.

The government is just starting to realise cash for tsunami rebuilding programmes. Donors have also been pressing the government to get a joint deal with the LTTE to spend tsunami aid which has hit a rough patch because of opposition from the government’s coalition partner, JVP.

The Marxist JVP has also been campaigning against reforms in the energy sector, which is backed by the Asian Development Bank.

Politically inspired jitters, leaves the local investors as the predominant buyers of the upcoming bonds. For domestic banks, the high return and the fact that as government paper they have a zero capital weighting are key.

Local banks are highly liquid these days because of the lack of investment opportunities as well as their reluctance to take risks in lending.

The government is also looking towards the top end of Sri Lankans working abroad to buy into the bond. In the last round, high net worth residents who hold dollars abroad are believed to have bought into Development Bonds.

Sri Lanka’s one million expatriate workers, mainly from the Middle East, sent back around US$ 1.5 billion in 2004.

State-run Bank of Ceylon recently raised US$ 100 million through a private placement on behalf of the Sri Lankan government.

-Mel Gunasekera: mel@vanguardlk.com