Bond, Dooms bond

Central Bank said it is planning to issue government debt with interest linked to the inflation rate.
Officials of the Public Debt Department say that the proposal, still in the initial stages, could become reality before the end of the year.rn

rnThe interest rates on the bonds will be directly linked to inflation as identified by a specified inflation index.rn

rnThe widely used Colombo Consumers Price Index will not be calculated from next year, prompting analysts to say that the Central Bank might use the Sri Lanka Consumer Price Index as the benchmark.rn

rnBond traders expect interest rates, which are at three decades lows, to fall further during the next 12 months.rn

rnInflation numbers are also at some of the lowest levels seen in recent times, with headline inflation according to the CCPI expected to fall below six and a half percent by the end of the year.rn

rnInflation linked bonds ensure that lenders always get a positive real return.rn

rnBut critics say such bonds can take away the advantage government gets from fixed rate domestic bonds in times of economic crisis.rn

rnUnlike foreign debt, domestic currency debt becomes proportionately smaller in real terms with the passage of time, in a country like Sri Lanka that has relatively high inflation.rn

rnFixed interest rates can also turn negative, when inflation goes up.rn

rnAll this helps reduce the real burden of debt to a country in crisis.rn

rnInflation indexed bonds can take away this advantage.rn

rnCritics say Sri Lanka, which has a fifty-year history of irresponsible leadership is more than likely to get into an economic crises in the future.rn

rnIn times of bad economic management, inflation linked bonds will automatically increase pressure on the budget and take away the benefits of inflation.rn

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