Foreign commercial debt still higher than concessional

18 October 2015 by Paneetha Ameresekere

CC - Flickr - McKay Savage

Despite the seemingly best efforts by the present regime to limit foreign commercial borrowings, such debt still continued to be higher than concessional debt, data showed.

While total foreign debt year-on-year (YoY) declined by Rs 101,939 million (Rs 101.9 billion)... Rs 3,069,366 million (Rs 3069.4) billion by end March 2015 (in percentage parlance this decline being 3.21%), total foreign commercial borrowings in the review period however, increased by Rs 87,424 million (87.4 billion) or by 5.31% YoY to Rs 1,557,971 million (Rs 1,511.4 billion).
Meanwhile, concessional borrowings in the review period marginally declined by Rs 14,514 million (Rs 14.5 billion) or by 0.95% to Rs 1,557,971 million (Rs 1,558 billion).

Sri Lanka’s foreign debt mix according to latest data available comprised 50.76% non concessional and 49.24% concessional.
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
’s immediately preceding Resident Representative Dr. Koshy Mathai speaking to reporters prior to his departure in 2013, warned of the dangers in the rise in commercial borrowings, because of, ipso facto, the threat it may cause to the economy when servicing such high debt, with the possibility of international commercial rates once more being on the rise.
Sri Lanka, once a recipient of grant and concessional aid from friendly countries, increasingly became reliant on foreign commercial loans from China, consumed with vigour by the previous regime, due to China’s ’no questions asked’ policy.

Some of those projects built with Chinese commercial loans were grey, like building a costly harbour at Hambantota and an international airport at Mattala, where no ships dock and no planes land.

Now the time has come to service such loans, causing a strain on the country’s foreign reserves. Sri Lanka runs a deficit in the current account in the balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. (BoP), dubiously helped by a negative trade balance Trade balance The trade balance of a country is the difference between merchandize sold (exports) and merchandize bought (imports). The resulting trade balance either shows a deficit or is in credit. because of which the rupee is under continuous depreciating pressure.

Matters are compounded due to foreign exits from the government securities market and the Colombo bourse, which causes further bludgeoning of the rupee. Sri Lanka is an import dependent economy. Therefore, a weak rupee will cause consumer prices to rise, thereby causing socio-politico instability in the country. Matters are made worse due to inflows drying up.

In order to avoid this scenario, the exchange rate (ER), more often than not, operates under a controlled regime. However, since 4 September, 2015 it has been working in a liberalized regime, due to a BoP crisis facing the economy.
Nonetheless, the ER, in the one year period to 31 March, 2015, had depreciated by 2.33% or by Rs 3.05 to Rs 133.75 to the US dollar in two weeks forwards, where, under the latter foreign exchange commercial transactions, the market had been dealing in the foreign exchange (FX) market due to Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

of Sri Lanka’s (CBSL’s) controls then.

The ER, as at 31 March, 2014, had had been dealing at the price of Rs 130.70 in the market, virtually in all cases, i.e. whether it be spot, cash, tom or ’spot next’, due to exchange controls imposed by the previous regime.

The ER as at 2.10 pm on Tuesday had had been dealing at Rs 140.50/55 to the dollar in spot prices in two way quotes under a liberalized regime.

Therefore, since 31 March, 2014 to 2.10 p.m. on Tuesday, the ER had had depreciated by between Rs 9.80-9.85, or by between 7.50% to 7.54%.

It were these painful adjustments, like the liberalization of the ER, as being advocated as one of the panaceas, though not said in so many words, economists like Dr. Indrajit Coomaraswamy had been recommending in recent seminars, as an answer to the country’s many economic woes.

Meanwhile, with steps taken by the current regime to mitigate foreign commercial borrowings, March 2015 over December 2014 sharply fell by 4% YoY to Rs 1,557,971 million; while concessional loans grew by 1.4% to
Rs 1,511, 395 million.

In contrast, when the previous regime was in power, though foreign commercial loans fell by 3.14% or by Rs 52, 577 million to Rs 1,622,138 million; end December 2014 quarter over end September 2014 quarter; concessional loans by Rs 17,207 million or by 1.14% to Rs 1,490, 978 million and overall foreign debt by Rs 69,784 million or by 2.19% to Rs 3,113,116 million; yet the foreign loan mix vis-a-vis foreign commercial debt to foreign concessional debt, was very much in favour of the former.

Foreign commercial debt as a percentage of total foreign debt as at end December 2014 stood at a massive 52.11%, whereas foreign concessional debt was at a low percentage figure of 47.89%.These percentages, quarter on quarter, as at March 2015, however, had seen foreign commercial debt declining to 50.76% and foreign concessional debt rising to 50.76%, which, under the circumstances are positive trends.

Source : Ceylon Today



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