Nov 22, 2007 (LBO) – Sri Lanka Central Bank governor Ajith Nivard Cabraal said Thursday the government wants to develop the bond market to be able to access new sources of capital and reduce reliance on concessionary lending. The government’s main funding sources were still mainly taxes and bilateral and multilateral loans but it wanted to diversify its funding options and develop new instruments to do so, he told a conference on developing of the island’s bond market.
Some of the soft loans the country had received had been damaging to its long-term interests, Cabraal said.
“We have had an exceptional record of debt repayments notwithstanding the fact that some of the loans were not in the best interests of the country,” he said.
“Some of these so-called concessional loans – we have realized that there was not much that was concessional about it.”
The bank done studies on the damaging effects of such loans which it intends making public, Cabraal said.
He referred to a 25 million soft loan that had been taken when the local currency’s parity was 4.50 rupees to the dollar.
“The loan was given for consumption – we have consumed and finished it. There’s nothing left but we’re still paying back the loan at a parity of 110-112 rupees to the dollar.”
He said the government had now realized taking such soft loans had been damaging to the country and was moving to raise funds through new methods like debt instruments despite the many criticisms against such practices.
“We want to move to new instruments and need to build up the capacity to do so and make use of emerging opportunities.”
Cabraal said even multilateral lending agencies had questioned the wisdom of the government going for commercial borrowing when it recently raised 500 million dollars in its first sovereign bond issue.
“But we took a calculated decision to tell Sri Lanka’s story and we realized there were many points that were attractive to investors.”
Cabraal said the sovereign bond issue was also useful as it would pave the way for the corporate sector to also borrow from international capital markets.
Sri Lanka was embarking on a big infrastructure development programme for which it needs funds from different sources like equity, private-public sector partnerships and bond issues.
The Sri Lanka rupee was 4.76 to the dollar in 1951 when the central bank was created by abolishing the earlier currency board.
In the intervening period it had printed enough money to create multiple currency crises, double digit inflation and bring the rupee dollar parity to 112 in 2007. .