ISSN: 1391 - 0531
Sunday November 18, 2007
Vol. 42 - No 25
Financial Times  

Bond issue: Prudent cash management by government

By Natasha Gunaratne

Amidst the controversial announcement by the Finance Ministry on the entire expenditure of the US$ 500 million sovereign bond, some economists were optimistic about the move.

Lead economist at Lirneasia, Dr. Harsha De Silva said the government had used the money quite wisely. "Contrary to what people suggest, I think it is prudent cash management and at no point have I said it is not. However, the government should have been honest about it."

A statement released by the Ministry this week said the government invested approximately Rs.28 billion of US$500 million (approximately Rs.56 billion) between January and October 2007 on infrastructure development projects.

The projects include the Hambantota Sea Port, Puttalam Coal Power, Upper Kotmale Hydropower, Southern Highway, and Rural Community Water Sanitation amongst several other irrigation and provincial development projects.

De Silva takes issue with the fact that the government initially stated the purpose behind raising the money was for infrastructure which he said is not the real reason. "They should have been honest about it."

“Sri Lanka is borrowing money at a very high cost and currently, treasury bill rates are hovering around 16 or 17%,” De Silva said, adding that it was a wise move to bring down the cost of borrowing at every opportunity. "It is the treasury function of the government that is trying to reduce the overall cost of capital by using various strategies to bring down borrowing costs. But the issue is not that. These guys said we are raising money for infrastructure which is an utter lie."

"The government could have said that there are these loans and a high cost and we have to be prudent about managing them and therefore, let us go into a general purpose borrowing," De Silva said.

With general purpose borrowing, there would have been no need to come up with lists of infrastructure projects with actual names and costs. "One of the reasons I call this bluff from the beginning is because no right thinking person would really go out in the global marketplace and ask for money for infrastructure projects which they will pay back in one go as a bullet repayment in five years."

He added that the government keeps talking about the bond as a 'great victory', also citing the fact that Ghana borrowed at 8.5% interest while Sri Lanka's loan was acquired at 8.25% interest rate.

However, De Silva pointed out that Ghana borrowed at 8.5% over 10 years whereas Sri Lanka's loan is for 5 years. De Silva also said that the only reason Sri Lanka was able to get the loan is because there was a sovereign guarantee.


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