Bond issue - letter

Reference to the article which appeared in The Sunday Times FT last week headlined ‘Bond issue: Prudent cash management by the government,” I was surprised how anyone could commend the government’s US$500 million bond issue as a prudent cash management strategy citing reasons such as, it could bring down the cost of borrowing.

According to the argument the current Treasury bill rates are hovering around 16%-17%. Of course this rate is higher than 8.25%, which is the interest rate on the US$ 500 million government bond. But we must not forget the fact that Sri Lanka will have to repay the value of the government bond and the interest in dollars in five years time.

As at October 1 this year the dollar stood at Rs113.5 after appreciating 9.2% from a year ago. If we assume the dollar continues to appreciate at this rate over next five years, it would reach Rs 175 by the end of five years. With the accumulated interest, the repayment value of the bond in five years time would be US$743 million. As a result, the repayment value by the end of five years in rupees would be approximately 145 billion. For Rs 56 billion (US$500 million) to accumulate to Rs 130 billion after five years, it should cumulatively grow at approximately 18.5%. This is the effective interest rate that we’ll have to pay in rupees annually and which is the rate that we should compare against the interest on rupee borrowings including the Treasury bills.

The only way one can justify the lower interest rate on the government bond is by maintaining the value of the rupee over the period of the bond. Unless the government bridges its ever expanding budget deficit (Rs 293 billion in 2008, up 14% Y/Y), we would continue to see the rupee depreciating against the dollar and fail to justify the lower interest rates on the dollar denominated bonds.