Government borrows again — this time $50 million through NSB

The National Savings Bank’s has borrowed 50 million dollars from ICICI Bank, India’s larges private-owned bank, to lend to the government which economists say may be a new Treasury strategy to pass on the foreign-currency fluctuation risk to a middle-party.

"This could be a new strategy to use the NSB to borrow from the foreign market and in turn lend to the government in rupee terms," a senior economist said, adding that unlike the HSBC-led $500 million bond, the “government doesn't then need to carry the burden of the foreign currency-fluctuation risk”, an issue that has drawn public concern among other issues of foreign borrowings.A senior official of the NSB, the country's biggest state-owned savings bank, confirmed to The Sunday Times that the deal had been done at 5.5 percent interest and was meant to fund state development projects.

The government put forward the same argument when the HSBC-led bond was being negotiated. It was unclear whether the interest rate was what NSB was paying ICICI or getting from the government."This is a cosy relationship for the government -- high short-term borrowings without foreign currency fluctuation risks which would raise the cost of these loans," the economist said.

This is the second occasion in recent months that the NSB is providing a foreign loan (in rupee terms) to the government. A few months back, the state bank provided a Rs 450-million (worth) foreign dollar loan to the Treasury, taken from its own foreign currency account at the Central Bank, making it a near total of $100 million given to the government."How much more is in the pipeline is anybody's guess," the economist added.

These come on top of the massive $500 million bond given to the government recently in a deal brokered by three banks including HSBC. This issue was intended to fund infrastructure development but later the Central Bank said it was being used to pay off debt and other borrowings, with analysts saying the money 'evaporated' in 48 hours after it arrived!

The NSB official, however, said the (latest) transaction was made with the consent of the Central Bank in a transparent manner and it was not a secret deal. The NSB is prepared to enter into more loan transactions with any foreign commercial bank for the benefit of the country, he said.

On the other hand foreign banks are prepared to lend money to Sri Lankan government as it has not defaulted in the repayment of such loans, the senior official said, adding that the HSBC-led bond was recently praised in international markets. He said the country had an excellent debt servicing record, and Sri Lanka had succeeded in attracting more foreign investors so that there is 'nothing to worry about foreign bank borrowings'. The NSB is said to be the only state bank that has a government guarantee, another reason why it is attractive to foreign banks to lend.

Another analyst asked whether the NSB-led move was part of a strategy of borrowing over 12 months, in short bursts regularly with replacement cash coming via annual long term bond issues of $500 m at a time.

"This exposes the nation to short and medium term risks of credit, liquidity commitments, and interest rate risks. The worst thing is that all this is being done with little or no transparency or accountability," he said.The government needs money for local expenditure and but doesn't need to borrow in dollars as its foreign exchange reserves are strong due to high remittances and inflows from earlier foreign borrowings.