The government’s proposal to raise a syndicated loan of US$300 million is mist likely due to rising government expenditure, according to economists.

Colombo University economist Dr. Sirimal Abeyratne estimates that since the government took out the US$500 million sovereign bond awhile back, it has most probably borrowed close to US$1 billion. "I think the government has diverted its borrowings from domestic to foreign sources," he said. "Although the government indicated that this is for infrastructure, government expenditure is rising for various reasons because they are short of money for everything, including recurrent expenditure."

Dr. Abeyratne said the government has undertaken massive infrastructure projects over the past several years but questioned as to why the private sector is not participating in these projects. The other reason the government is keen on borrowing from abroad is the stabilization of the exchange rate due to the balance of payment problem. He added that borrowing from abroad has little impact on internal interest rates which are already quite high.

Dr. Abeyratne said the important question is if the government borrowings will improve or deteriorate the macroeconomic conditions. "If borrowing is efficiently and effectively used, then it is not a bad thing. However when we start to pay these loans back, we need to generate more foreign exchange and now there is very little talk about export promotion and the foreign exchange earning capability of the country. If we don't grow adequately and don't improve our export market and export promotion, then there will be problems."

Due to the Central Bank's (CB) tight monetary policy, Dr. Abeyratne said the rate of inflation has come down a little but inflation still remains high. He said the macroeconomic fundamentals remain weak and sees no reason at the moment why they should imrove.

A CB press release stated that the government plans to raise Rs.32 million (US$300 million) by way of a syndicated loan in US dollars or any major reserve currency from international markets. The CB said the funds would be used for finance of the ongoing infrastructure projects. With this additional borrowing, the government is of the view that there will not be any further need for foreign currency borrowings this year. The CB explained that after this foreign currency borrowing as well as the other expected borrowings during the rest of the year into consideration, the Debt/GDP ratio is estimated to be at the level of 78.5% at the end of 2008 as against the ratio of 85.8% at the end of 2007.

According to the press release, the government funding programme of 2008, as approved by the Parliament in the Appropriation Act in December 2008, empowers the government to borrow Rs.708 billion to finance the Budget 2008. Of such amount, Rs.460 billion (Rs.323 billion from domestic sources and Rs.80 billion from foreign sources) amounting to approximately 65%, has been raised by the government so far. At the same time, a few other loans amounting to approximately Rs.16 billion are presently being negotiated. Accordingly, the CB stated that a further amount of Rs.232 billion is available to be borrowed within the approved limits.

The proposed syndicated loan of US$300 million is expected to have a maturity period of two years or more with a floating or fixed rate of interest.