China is Sri Lanka’s leading lender at present, providing loan facilities amounting to around US$ 3 billion so far but at interest rates higher than that of multilateral agencies for the country’s infrastructure development and other mega projects, with the repayment period running up to 20 years, government officials said.
They noted that long term borrowing from China at interest rates ranging from 2-3% and 6-7% under strict conditions laid down by Chinese lending institutions was the only option available to the Sri Lankan government to implement post-war development projects in North, East and the South. On the other hand the country has received several soft loans from China at an interest rate of 2-3% with maturity terms of 20 years, with 5 years expandable on condition, and 2-5 years grace period, they revealed.
The Business Times obtained these details of Chinese loans and other financial assistance which have not been fully disclosed to the public, particularly the interest rates.
The country has also obtained concessionary loans at an interest rate of London Interbank offered Rate (LIBOR) plus basis points, which is negotiable to condition, 12-15 years as terms, and 2-5 years grace period, and the financing has been covered by an insurance premium issued by Chinese Sinosure, a state-owned insurance company for import-export business, a senior government official, who wished to remain anonymous, told the Business Times.
Addressing a press conference in Colombo recently Deputy Economic Development Minister Lakshman Yapa Abeywardena said, "While the HSBC, for example, was offering loans with 9% interest rates, China has been offering loans for very low rates, such as 1% or even 0.5%,".
However according to Finance Ministry sources, multilateral donor agencies such as the World Bank, and the Asian Development Bank provide soft loans at a very low interest rates ranging from 0.25 %, 2% or 3%. But these agencies stipulate strict conditions.
Financial resources provided by China as foreign assistance falls into three categories: Grants (gratis cash), interest-free loans and concessionary loans. The first two comes from China's state finances while concessionary loans are provided by the Export-Import Bank of China (Exim Bank) as designated by the Chinese government.
Citing an example, the official noted that Sri Lanka has borrowed $306 million at 6.3% for Phase I of the Hambantota Port Project. A one-year grace period is followed on completion of the construction. The loan repayment period is 11 years with two installments per annum, he said. He noted that Treasury officials had been able to adjust the previous interest rate attached to LIBOR after negotiations with the Exim Bank. Sri Lanka was able to obtain Chinese loan facilities for several development projects including the Mattala Airport in the South, Colombo-Katunayake expressway and a 900 megawatt coal-fired power plant as well as for rebuilding roads in the North and through negotiations avoided the fixed interest rate on the basis of the Commercial Interest Reference Rate (CIRR) as monthly announced by OECD, he added.
The Chinese government has provided $891 million through the Exim Bank to finance Phase II of the Norochcholai Coal Power Plant Project in Puttalam District, under a Preferential Buyer's Credit Facility at an interest rate of around 4%. According to the terms and conditions of the Exim Bank, Chinese companies should be selected as the project contractor and for procurement projects, equipment supply shall in principle come from a Chinese exporter. In project procurement, priority shall be given to equipment, materials, technology or services from China. In principle, no less than 50% of total procurement shall be made in China; China expects nothing from Sri Lanka other than the honouring of the repayment conditions, he added.
Economist and UNP MP Dr. Harsha De Silva told the Business Times that the government is trying to highlight these Chinese loans as investments and that is why they don’t divulge interest rates. “We want full transparency in these financial transactions,” he said adding that recent land deals with Chinese company CATIC and Shangri-La at Galle Face were a complete violation of the laws and tender procedures. “Like Chinese loan interest rates, nowhere in the records of the Sri Lankan Government can we find the information about this unlawful and deceitful sale. In which register is the disbursement of these funds recorded? Are these funds deposited outside of the Treasury account?” he asked.