Yahapalana Govt. borrowed US$ 12,050 million from 2015-2019 | Daily News

Yahapalana Govt. borrowed US$ 12,050 million from 2015-2019

Sri Lanka is confident that the short-term steps taken during the last month to manage the economic and fiscal crises, would allow sufficient space for carefully drafted long term measures to ride over the challenges.

The foundation for financial consolidation to manage the payment crisis was laid with securing bridge financing in the interim period until the International Monetary Fund (IMF) financing arrangements materialize later this year. In the meantime, an economic programme has been finalised, and implementing short to medium-term policies to ensure macroeconomic stability and facilitate greener, more inclusive, sustainable, and stable growth in the country.

Another step taken was to make a formal request to Rapid Financing Instrument (RFI) in order to secure an Extended Fund Facility (EFF) to overcome the current difficult financial situation. This would be favourably considered by the IMF and expected to result in immediate financing for the country, which will be a bridge to the EFF.

IMF assistance

After the preliminary talks held with the IMF and World Bank last month by Finance Minister Ali Sabry, PC and Central Bank Governor Dr. Nandalal Weerasinghe, further official level negotiations will take place to finalise the agreement with the IMF.

Several countries including India extended Credit Lines for immediate purchases and agreed to restructure loan payments. Indian Credit Line of US$ 1 billion at the Indian Credit Facility Coordinating Unit (ICFCU) of the Ministry of Finance is currently available for importers and the ministry called them to register in order to avail themselves of credit facility. India has also agreed to extend an additional US$ 500 million Credit Line to help Sri Lanka import fuel. New Delhi has also already agreed to defer US$ 1.5 billion in import payments that Sri Lanka needs to make to the Asian Clearing Union.

Some interested parties have been carrying out a disinformation campaign with regard to the loans availed by Sri Lanka over the years and try to place burden on the current government.

However, the fact of the matter is Sri Lanka did not borrow anything during 2020, 2021 and 2022 so far. Sri Lanka is due to repay US$ 500 million in foreign debt in January, with some economists with political agendas saying if Sri Lanka fails to repay, it will declare itself a bankrupt country. They also said that international credit ratings are being downgraded. However, even though credit ratings may be declining at the time of borrowing, is it correct to question whether Sri Lanka’s credit rating will go down when repaying the loan?

There are many allegations on Sovereign Bond issues too. Clarifying the position, the Central Bank stated that it was during the previous government, on July 18, 2016, Sri Lanka purchased US$ 500 million in international Sovereign Bonds payable on January 18, 2022. This is a bond guaranteed by the government at an interest rate of 5.75%.

International Sovereign Bonds (ISBs) are issued by the Central Bank of Sri Lanka on government funding requirements to support the US dollar deficit as well as reserve growth.

Figure 1 gives details of the International Sovereign Bonds issued by the Central Bank of Sri Lanka over the past decade. Those Bonds helped Sri Lanka grow its foreign reserves during the period 2009-2014 to develop the country and accelerate economic growth as well as GDP growth. GDP grew from US$ 42.1 billion in 2009 to US$ 79.4 billion in 2014. Per capita income increased from US$ 2054 in 2009 to US$ 3821 in 2014.

Despite the issuance of a large number of US$ 12,050 million International Sovereign Bonds (ISBs) during 2015-2019, the Sri Lankan economy receded. Sri Lanka’s Gross Domestic Product (GDP) increased slightly from US$ 79.4 billion to US$ 84 billion, while per capita income increased by only US$ 31 from US$ 3821 to US$ 3852 in five years.

It is noteworthy that Sri Lanka’s foreign exchange reserves did not grow, despite the inflow of US$ 12,050 million to Sri Lanka’s foreign exchange reserves during the period 2015-2019, to US$ 8,208 million.

The following are the amounts of International Sovereign Bonds (ISBs) that Sri Lanka has not issued until December 1, 2021.

Considering the data (Figure 3), out of the US $13,050 million in international Sovereign Bonds to be repaid, only US $12,050 million is to be paid in bonds purchased from 2015 February to October 2019 with high interest rates.

Considering the above international Sovereign Bonds (Figure 2), the Central Bank issued US$ 12,050 million over the last five years. In some cases, they have agreed to pay a higher interest rate of 7.85%. Having to pay such high interest rates in US dollars is detrimental to the country.

Although some have criticized Sri Lanka’s relative exchange rate with Bangladesh at an interest rate of 2% - 3%, it is surprising that they did not criticize borrowing at a rate of 7.85% at that time.

It is noteworthy that the Central Bank of Sri Lanka has not issued any international sovereign bonds in 2020 and 2021.

Furthermore, the effects of the Coronavirus forced the country to lockdown, reduced production and collapsed the tourism industry, adversely affecting the Sri Lankan economy.

Revenue from US$ 4.3 billion in 2018 fell to US$ 3.6 billion as a result of the Easter attacks. The decline in tourism revenue to US $ 0.6 billion by 2020 had a major impact on the country’s foreign exchange reserves.

COVID-19 pandemic

Sri Lankan currency

The next blow to the economy came from the global COVID-19 pandemic.

The economic challenges facing Sri Lanka due to COVID pandemic was severe as it has dealt a major blow to economic activities while causing a heavy burden on the health sector. The foreign exchange reserves dipped alarmingly due to these factors. In the five years before the pandemic, US$ 12,050 million had been added to the Sri Lankan economy in the form of international Sovereign Bonds.

When the US$ - SL Rupee fix was removed two months ago, Sri Lankan rupee collapsed — from about 201 to the dollar to around 360. Such volatility could be eliminated by giving the exchange rate a strong mooring — of the kind that existed in Sri Lanka’s own past. In the 1950s Ceylon rupees were convertible 1:1 into Indian rupees, but they were backed mainly by British Pounds with some Indian currency reserves thrown in. That arrangement worked as long as the Indian currency was also linked to the Pound.

While the current exchange rate is a windfall for Sri Lanka’s apparel and tea exporters, costlier imports have resulted in a galloping inflation rate. Prices rose nearly 29 percent compared to the rate in April 2021. Hence, stringent measures are required to check inflation.

Although the government has the obligation of repayment of foreign loans, as the accurate data show, it is not the current government which has over-burdened the country with foreign loans.



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