News
Hambantota port loan: China defends hike in interest rate
Loans obtained from China under commercial terms may explain why Sri Lanka paid a higher interest rate to borrow US$ 307 million for the Hambantota Port project’s first stage. China’s state media on Thursday cited an unnamed “leading financial expert” in Sri Lanka as saying Colombo had sought commercial loans. This was the choice Sri Lanka made in the absence of loans on preferential terms at the time from Beijing.
Xinhua, China’s state news agency, cites the financial expert as saying that the quota of China’s preferential loans to Sri Lanka had been used up for the Norochcholai Coal Power Plant and other projects. ”At first, the Sri Lankan team tried to seek loans from banks from other countries. However, those banks had no interest in providing loans to a country which was facing a civil war. Then, the Sri Lanka side turned to Chinese banks and companies,” Xinhua quotes the financial expert as saying.
Late April this year, the Chinese Chamber of Commerce in Sri Lanka said that in 2007, in a rising interest rate environment, Chinese banks offered “some commercial loans with 6 per cent interest rates which were quite favourable and reasonable at the time”.
China offers concessional loans mainly for manufacturing projects and large and medium-sized infrastructure projects with economic and social benefits, or for the supply of complete plants, machinery and electronic products, a Chinese government white paper explains.
Xinhua quotes the Sri Lankan financial expert as saying that “the Sri Lankan delegation decided to ask for commercial loans. In fact, to get commercial loans as large as 300 million US dollars during the war was not easy”. This was a reference to the financial risks during the war against Tamil terrorism.
The China EXIM Bank had given Sri Lanka two choices — a fixed rate at 6.3 per cent and a floating rate with the London Interbank Offered Rate (LIBOR), which was above 5 per cent then with the trend to rise higher, Xinhua reported. ”The delegation thought the fixed option was more beneficial for Sri Lanka and chose the fixed rates option. One should note that the interest rate of the Treasury bill was 12-14 per cent in 2007. Considering all the factors, the fixed rate at 6.3 per cent was the best choice then.
“Anyone in that situation would make such a decision, and couldn’t predict the sudden international financial crisis and dramatic drop of LIBOR in 2008. It is unfair to judge the then decision based on the situation afterwards.” The expert says borrowing on commercial terms was “the best choice” at the time.
However, the Xinhua story does not explain why the request for a revision of the interest rate from LIBOR plus 0.9 perc ent to a fixed rate of 6.3 per cent was first made in September 2008 and not in 2007. As observed by the unnamed Sri Lankan expert quoted by the news agency, the LIBOR experienced a “dramatic drop” in 2008, ending the year at a high of 1.087 per cent and a low of 0.110 per cent. The slide started in October 2007 and continued throughout the following year.
Sri Lanka Ports Authority officials confirmed that the Cabinet paper seeking a “conversion of the variable interest rate to a fixed interest rate of 6.3%” was presented by former President Mahinda Rajapaksa in his capacity as Minister of Finance and Planning on September 10, 2008. It was taken up in Cabinet on October 2, 2008, and subsequently approved.
Government figures show that in 2007, the total foreign borrowings by Sri Lanka amounted to US$ 1.674 billion, of which, project loans accounted for US$ 1.504 billion. Grants accounted for US$ 170 million. During that year, the Asian Development Bank committed US$ 300 million for the Colombo Port South Harbour Expansion Project. The ADB also committed US$ 80 million to improve the education sector, US$ 50 million to develop the SME sector and a supplementary loan of US$ 13.6 million for the secondary towns water supply project, Treasury data show.
Xinhua reports that the China EXIM Bank, the largest loan provider to Sri Lanka, has provided over US$ 6 billion. Some 77 per cent are preferential loans, of which the interest rate is 2 per cent per year. The remaining funding gap has been covered by commercial loans.
Both these two types of loans have contributed a lot to the development of Sri Lanka, the unnamed Sri Lankan financial expert noted, Xinhua said. The expert says borrowing on commercial terms was “the best choice” at the time. Government figures show that in 2007, the total foreign borrowings by Sri Lanka amounted to US$ 1.674 billion, of which, project loans accounted for US$ 1.504 billion. Grants accounted for US$ 170 million.
Xinhua reported that the expert said the borrowing on commercial rates for the Hambantota Port was “appropriate”, and that the interest rate was “low”. Rounding on Finance Minister Ravi Karunanayake’s politically-motivated unsubstantiated claims of China charging high interest rates, the Chinese Chamber of Commerce in Sri Lanka spokesperson Chen Chuan told Xinhua on April 26 that the interest rates of Chinese loans were not high.
During the past 10 years, at the request of the Sri Lankan Government, China has provided loans amounting to several billion US dollars in supporting of Sri Lanka’s economic and social development, among which more than half are at the interest rates of only 2 per cent.