{"id":49266,"date":"2015-11-10T04:43:38","date_gmt":"2015-11-10T11:43:38","guid":{"rendered":"http:\/\/www.lankaweb.com\/news\/items\/?p=49266"},"modified":"2015-11-10T04:43:38","modified_gmt":"2015-11-10T11:43:38","slug":"lanka-piles-more-billions-onto-foreign-debt-load","status":"publish","type":"post","link":"https:\/\/www.lankaweb.com\/news\/items\/2015\/11\/10\/lanka-piles-more-billions-onto-foreign-debt-load\/","title":{"rendered":"Lanka piles more billions onto foreign debt load"},"content":{"rendered":"
\n

By Kapila Bandara\u00a0Courtesy The Sunday Times<\/em><\/span><\/h2>\n<\/div>\n

Sri Lanka continues its borrowing spree, adding several billions to its massive debt load by issuing yet more debt \u2014 a US$ 1.5 billion 10-year international sovereign bond.\u00a0Sri Lanka will pay a higher 6.85% annual interest on the additional billions borrowed.<\/p>\n

Just months earlier, the Government borrowed US$ 650 million through a 10-year sovereign bond at an annual yield of 6.125%. It emerged last week that Sri Lanka is also awaiting a US$ 4.5b handout from the International Monetary Fund.
\nYet again, economists have warned of a possible balance of payments crisis.<\/p>\n

The balance of payments deficit worsened in the first eight months of the year to US$ 1.79b, compared with a US$ 2.15b surplus a year earlier, Central Bank data show.\u00a0The latest USD bond, and the ninth such borrowing exercise, came against the backdrop of several alarming indicators.<\/p>\n

Foreign exchange reserves have shrunk (US$ 6.5b in August), the fiscal situation is perilous, costs of paying down the debt are rising, (debt servicing costs exceed 35% of government revenue), exports are continuing to drop (down by 19.5% in August), and alarmingly, joblessness among women has been rising.<\/p>\n

Unemployment increased to 4.7 per cent in the first quarter of this year from 4.1 per cent in the first quarter of last year, mainly because of rising joblessness among women, Finance Minister Ravi Karunanayake admitted last month at the IMF-World Bank meetings in Lima, Peru.<\/p>\n

In September, after a review, the IMF noted the need to keep the 2016 fiscal deficitdown to 5.5 percent of GDP. It urged expenditure restraint and durable revenue reforms and emphasised the need to eliminate tax exemptions, tax holidays and reduced rates to make the tax system simple, fair, and efficient.<\/p>\n

Some taxes will be reduced under a mid-term policy blueprint just announced by Prime Minister Ranil Wickremesinghe.
\nEvoking the Maha Parakramabahu era\u201d, when he said Sri Lanka exported elephants, he promised to bring back such an era of prosperity for the nation once again\u2019\u2019, while also acknowledging that he heads the government of the most corrupt economy of Asia\u2019\u2019.<\/p>\n

He also pledged to create 1 million jobs and repeated his mantra of a social market economy\u2019\u2019.He told Parliament, Sri Lanka would aim for a budget deficit of 3.5% of GDP in four years.\u00a0This year, however, despite IMF concerns, the budget deficit is expected at between 6.5% and 6.8% of GDP.<\/p>\n

In this heavily-indebted island, 43 percent of the people are earning less than US$ 2 a day (Rs 283), Mr. Wickremesinghe admitted.\u00a0Once again, Sri Lanka is revisiting a perilous situation from the past. Just three years ago, Sri Lanka stared in to the abyss and the IMF offered a US$ 2.6b standby facility. It was approved in 2009.<\/p>\n

In 2012, international reserves were depleted and the Rajapaksa regime raised policy rates by 50 basis points, jacked up fuel (by 32%) and electricity prices (by 20%), and abolished the rupee trading band among other things, to get to grips with the alarming current account deficit. The rupee depreciated by 5%.<\/p>\n

Gross reserves shrank from US$ 8b in mid-2011 to less than US$ 5.5b, or 2.7 months of import cover, IMF data show.
\nThis was a time when Sri Lanka was selling itself as the Emerging Wonder of Asia\u2019\u2019 under the Mahinda Chintana\u2019\u2019.
\nBy 2011, the current account deficit had widened to 7.5 percent of GDP.<\/p>\n

In 2010 and 2011, the bulk of the current account deficit was financed through two 10-year sovereign bonds of US$ 1b each.
\nYet again, economists have warned of a possible balance of payments crisis.\u00a0The balance of payments deficit worsened in the first eight months to US$ 1.79b, compared with a US$ 2.15b surplus a year earlier, Central Bank data show.<\/p>\n

The latest USD bond, and the ninth such borrowing exercise, came amid the backdrop of several alarming indicators.
\nForeign exchange reserves have shrunk (US$ 6.5b in August), the fiscal situation is perilous, costs of paying down the debt are rising, (debt servicing costs exceed 35% of government revenue), exports are continuing to drop (down by 19.5% in August), and alarmingly, joblessness among women has been rising.<\/p>\n

Unemployment increased to 4.7 per cent in the first quarter of this year from 4.1 per cent in the first quarter of last year, mainly because of rising joblessness among women, Finance Minister Ravi Karunanayake admitted last month at the IMF-World Bank meetings in Lima, Peru.<\/p>\n

Hundreds of thousands of women continue to migrate for slave labour jobs, mainly in Gulf Arab states. Soon, these unfortunate economic heroes\u2019\u2019 will be squeezed further when they are taxed more at departure.\u00a0Exports have been on a slippery slope since the second half of last year, Central Bank data show.<\/p>\n

Earnings from tea exports in August tumbled by 33.9% to US$ 92 million.
\nTextiles and garments exports fell by 6.6%.
\nIn the first eight months, exports dropped by 3.4% year-on-year, to US$ 7.1b.
\nThe rupee has fallen by 7% up to October.
\nDespite the weakening economic indicators, mega pet projects of politicians are being funded with resources Sri Lanka does not have.<\/p>\n

Also, US$ 1.1 billion made available earlier by India has been used up.
\nOverwhelmed by mounting debt and high interest payments, the Central Bank and the finance minister have publicly expressed eagerness to re-pay borrowings over a much longer period and to refinance existing debt with concessionary loans.
\nGenerations of Sri Lankans will be carrying the debt burden.<\/p>\n

Just weeks before the latest bond issue, Mr. Karunanayake had complained to a long-established Hong Kong newspaper that, Chinese loans are a big part of our problem. A bulk of the government expenditure goes into servicing them.\u2019\u2019 He was referring to debt servicing costs.<\/p>\n

He told the state media the past week that Rs 1.5 trillion was needed to service the massive debt. He also said the IMF had promised a US$ 4.5 billion facility.Despite the heavy debt load, the Central Bank claimed for itself the dubious honour that the US$ 1.5b that was borrowed was the largest offering in the international bond market since 2007\u2019\u2019, and gushed that it shows the continued investor confidence in Sri Lanka\u2019\u2019.<\/p>\n

It noted that the bond was also oversubscribed. Final order books stood at US$ 3.3 billion,\u2019\u2019 the Central Bank trumpeted.
\nBut the Bank, now headed by former HSBC banker Arjuna Mahendran, did not disclose fees paid to international banks, Citigroup, Deutsche Bank, HSBC and Standard Chartered Bank for the bond issuance.<\/p>\n

Sri Lanka paid a relatively high interest rate in a low-yield environment.The yield on the benchmark 10-year US Treasury was 2.018 percent on October 27, Reuters data show.\u00a0International credit ratings agency Standard & Poor\u2019s told The Sunday Times, the interest rate paid by Sri Lanka was broadly similar to other emerging market sovereigns in this ratings category.\u2019\u2019 S&P gave the bond a \u2018B+\u2019 rating.<\/p>\n

S&P cautioned that the bond issue was likely to add to Sri Lanka\u2019s debt burden which, combined with high debt servicing costs, results in very weak fiscal indicators\u2019\u2019.\u00a0S&P said Sri Lanka was capable of paying down its debt.\u00a0In view of Sri Lanka\u2019s robust nominal GDP growth and some fiscal consolidation, we expect net general government debt to fall to 66% of GDP by year-end 2018, from 70% in 2013,\u2019\u2019 S&P explained.<\/p>\n

However, the rate of decline could slow if the new Government departs from the current fiscal consolidation path, efforts to improve revenue disappoint, or if the rupee depreciates further against major currencies (as 61% of government debt was denominated in foreign currencies as of May 2015).<\/p>\n

In addition, we expect only slow progress in reducing debt-servicing costs, which accounted for 37% of government revenue in 2014. This is the second-highest ratio among all 129 sovereigns that Standard & Poor\u2019s rates, second only to Lebanon.\u2019\u2019
\nSri Lanka\u2019s sovereign credit rating reflects the country\u2019s relatively low wealth, improving but still moderately weak external liquidity, and a high government debt and interest burden. In addition, while the government has recently taken steps to strengthen governance, we consider the current gaps in institutional capacity to pose risks to Sri Lanka\u2019s institutional and governance effectiveness,\u2019\u2019 S&P observed.<\/p>\n

Moody\u2019s Investors Service also has expressed concerns on the large debt burden, low revenue mobilisation, substantial debt-servicing costs, and high dependence on external financing. Although fiscal reforms and improved public-sector enterprise financial performance have started to gain traction, the path of fiscal consolidation and debt reduction will likely be gradual in part on account of weakness in revenue mobilisation.\u2019\u2019<\/p>\n

Moody\u2019s said that in the long term, Sri Lanka\u2019s credit profile would improve from more progress in fiscal consolidation and further reduction in external vulnerabilities.\u00a0Moody\u2019s assigned a B1 rating (comparable to Mongolia and Pakistan) to the latest US dollar bond.<\/p>\n

The rating was based on the evaluation of moderate economic strength, moderate institutional strength, very low fiscal strength and moderate susceptibility to event risk.\u00a0The very low assessment of fiscal strength reflects the Government\u2019s large debt burden \u2013 almost twice as high as the median for B-rated peers, and heavy debt service requirements in relation to GDP and government revenues, Moody\u2019s explained.<\/p>\n","protected":false},"excerpt":{"rendered":"

By Kapila Bandara\u00a0Courtesy The Sunday Times Sri Lanka continues its borrowing spree, adding several billions to its massive debt load by issuing yet more debt \u2014 a US$ 1.5 billion 10-year international sovereign bond.\u00a0Sri Lanka will pay a higher 6.85% annual interest on the additional billions borrowed. Just months earlier, the Government borrowed US$ 650 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12],"tags":[],"class_list":["post-49266","post","type-post","status-publish","format-standard","hentry","category-forum"],"_links":{"self":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/49266","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/comments?post=49266"}],"version-history":[{"count":0,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/49266\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/media?parent=49266"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/categories?post=49266"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/tags?post=49266"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}