Sri Lanka reaching foreign borrowing limits, may need rate hike: report

Apr 05, 2012 (LBO) – Sri Lanka is reaching its foreign borrowing limit and interest rates may needed to be raised further to curb credit and cure a balance of payment crisis, a media report quoting Treasury Secretary P B Jayasundera said “Sri Lanka is reaching the limits on borrowing. The government itself has a $3 billion bond market,” Jayasundera was quoted as saying by Reuters, a news agency.

“Given our size, reserve levels, export size, I would consider that’s a kind of a ceiling.

“So we can’t go for unlimited borrowing for external balances.”

Sri Lanka ran into a balance of payments crisis in mid 2011 as state borrowings spiked due to losses in state enterprises amid strong private sector credit.

As part of the solution, foreign ownership of government rupee denominated debt was expanded and private entities were also encouraged to borrow abroad.

But foreign borrowings simply encourage more spending and imports by feeding a credit cycle rather than curbing it.

To keep the credit bubble and growth ticking, Sri Lanka had to resist an interest rate hike and allow the currency to depreciate, a move advocated by the International Monetary Fund. Depreciation however pushes inflation up and destroys real wa