By Natasha Gunaratne
The Sri Lankan government this week raised a US$ 150 million syndicated loan, another commercial borrowing to fund infrastructure project, in a move economists say will increase the nation’s debt.
This loan for projects listed out in the 2008 budget, economists fear is similar to the US$ 500 million loan taken in November 2007 which was used to pay off debt on on-going infrastructure development projects, and they noted that it will only result in greater accumulated debt burden.

The Central Bank (CB), announcing the loan, said the facility could be increased by another US$ 100 million if required. Colombo University economist Dr. Sirimal Abeyratne said so far, accumulated loans both foreign and domestic, amount to 85 percent of GDP but points out that Sri Lanka does not have any other option but to go for commercial loans.

"The problem is Sri Lanka does not get loans at concessionary rates anymore," he said. "There has been a decline in foreign grants, particularly from the European Union and so on. Sri Lanka is also considered a middle income country. The only option is commercial loans." Dr. Abeyratne said the usefulness and effectiveness of the loan depends on how the money is used. "The government is free to use it in any way it wants. That is a good and bad thing."

The CB has raised at least three similar loans in the past for funding infrastructure at commercial lending rates, other banking sources said. "This loan (current one) also contains a Greenshoe Option through which the Sri Lankan government could be aske to upsize the transaction by a further US$ 100 million, up to US$ 250 million, depending on the investor appetite. Some international banks have already expressed their interest to join the present group of lending banks in upsizing transaction," the CB statement said.

The lead bank is Standard Chartered Bank which has been joined by eight other banks. They are the BankMuscat S.A.O.G., Emirates Bank International PJSC, Indian Overseas Bank, Indian Bank, Colombo Branch, Indian Bank, Singapore Branch, Standard Chartered Bank, State Bank of India, the Arab Investment Company S.A.A. and HSBC.

Dr. Abeyratne it will take a few years to fully realize the effects of the loans for infrastructure projects but there is still no guarantee that anything positive will come out of it. "There is a high level of risk in these kinds of borrowings," he said. "We will have to pay these loans at high interest rates in the future and we have to earn foreign exchange because we are increasing our foreign debt burden." The problem will be further exacerbated if the export sector does not perform and the rupee continues depreciating.

Ideally, Dr. Abeyratne said the private sector should form partnerships with the government and play a major role in investing in infrastructure development projects, similar to what is taking place in India. However, he feels the private sector does not have confidence in the government because they have so far failed to improve the country's political climate. He did say international lenders are willing to loan to Sri Lanka because it has a good track record when it comes to repayment. "Our loan repayment is good and lenders have confidence in their money but whatever the economic situation is, we will have to pay it back."

The current loan has a three-year maturity with a yearly put option and cost of US$ 6 month LIBOR plus a margin of 250 basis points per annum.