Sri Lanka is among 28 countries which have no room to increase borrowing -- and aid is these countries' only option, according to a World Bank release this week.
The report on fiscal vulnerability in developing countries revealed that Sri Lanka has little or no debt headroom to meet the fiscal costs from the twin shocks of food and fuel prices.
The report comes in the wake of current moves by Sri Lanka to negotiate 150 million US dollars in commercial debt and obtain a further 300 million US dollars in a syndicated loan.
It also comes at a time when a global financial meltdown has hit the United States and pushed several European and Asian countries into recession. Analysts said the financial crisis could severely hit aid-dependent countries with donors diverting much of their financial resources to bail out the faltering banks.
Analysts said that one of the factors that may have upset this year's budget is the fertilizer subsidy for which Rs. 16 billion was allocated while another Rs. 20 billion has been approved for next year.
Among the other "fiscally vulnerable" countries on the list of 28 are Jordan, Cambodia, Lebanon, Jamaica, Eritrea, Ethiopia, Tajikistan, Madagascar, Nepal, Rwanda, Malawi, Ivory Coast, Eritrea, Fiji, Haiti, Seychelles, Djibouti, the Maldives and Mauritania.
Sri Lanka has also been identified as one of the countries where the Official Development Assistance has shown a large increase during the past few years. Sri Lanka's aid flow during the period had increased by over 40 per cent from 2002 - 2006.
The World Bank report was released ahead of the weekend International Monetary Fund and World Bank meetings of finance ministers.
World Bank President Robert Zoellick told journalists in Washington on Thursday that the world should not forget the "human rescue" needed in developing countries as it focused on the widening market crisis.
Central Bank Governor Ajith Nivard Cabraal reacting to the report told The Sunday Times yesterday that the World Bank should be analyzing as to how the Bank and the IMF failed to stem the international financial crisis that started in the US and spread to Europe, instead of picking on countries like Sri Lanka on food and fuel crises.
"The financial crisis began in the US, in the backyard of these financial twins which go around advising others on financial management. What were they doing about it? Didn't they see the alarm signals?" Mr Cabraal asked.
He said the Central Bank is looking after Sri Lanka's stability at a time when there was global turmoil. “The US Federal Reserve (Central Bank) is giving unsecured loans to financial markets while the Bank of England is giving money to 12 banks to recapitalize them,” he said adding that all over the world Central Banks were yearning for stability. "When this process is taking place, why are people getting upset about us?" he asked.
An economist said the World Bank reference to credit may have been a reference to the high borrowings of the government which has been the case for many years now. He said borrowings represent 80 percent of the total debt as a percentage of GDP (Gross Doestic Product). "Although it has come down from 105 percent in 2004, the borrowings are still high," he said. Analysts say the crisis in the US which has exploded across key financial markets, has been caused by the reckless provision of loans by financial institutions, particularly for housing without proper security and investigation. Many of these loans were given to bad creditors.
Narrow ‘meltdown’ shave for CB
Sri Lanka’s Central Bank missed by a whisker losing millions worth of foreign currency, when it pulled out its investments in failed US institutions Lehman Brothers and Merril Lynch – just two to three days before the two investment banks crashed, officials said.
“Two to three days before the collapse, we were informed by market intelligence and correspondent banks to pull out the money as the two institutions were heading for some trouble,” a senior Central Bank official said.
The US government scrambled late last month to bail out the two beleaguered institutions after a string of financial institutions collapsed triggering a major global financial crisis.
The Central Bank official said all the Bank’s reserves had now been invested in four Central Banks – the US Federal Reserve, the Bank of England, Bundesbank (Germany) and the Bank of International Settlements (BIS).
He said the normal practice was to invest the money in fixed deposits which had been done earlier in Lehman Brothers and Merril Lynch. He declined to say how much was invested abroad. The Central Bank’s 2007 annual report, in Table 129 on Assets and Liabilities of the Bank, shows that Rs 147 billion (US$140 million) was placed in ‘international organisations, foreign governments and foreign banking institutions’ at end 2007.