US$500 Bond issue -- Easy come, easy go

The US$500 million sovereign bond which was spent just three weeks after its procurement, according to a November 2007 statement by the Central Bank (CB), is believed to have been used purely to retire public debt, economists said.

The CB had said the money was spent, partly to finance infrastructure projects such as Hambantota Sea Port, Puttalam Coal Power, Upper Kotmale Hydropower, Southern Highway, national highways, irrigation and water sanitation projects.

But economist Muttukrishna Sarvananthan, Principal Researcher at the Point Pedro Institute of Development, said he believes the bulk of the money was spent on retirement of existing public debt. "I do not believe it has been spent on any infrastructure pojects," he said.

"This is in fact unbecoming of the Central Bank which claimed at the outset that the sovereign bond issue is for financing massive infrastructure projects," Sarvananthan continued. "In any case, this US$500 million has to be paid in five years. This is too short a time for the amount. That means the government's external public debt repayments in the next few years would be very high and therefore severely strain the balance-of-payments of the country."

United National Party (UNP) Parliamentarian Dayasiri Jayasekera told The Sunday Times FT that on October 26, two days after the government received the bond, only Rs.4 billion was left after having paid Rs.21 billion to the CB, Rs.13 billion to People's Bank and Rs. 9 billion to the Bank of Ceylon.

Moreover, Jayasekera said that a clause in the agreement the government entered into with HSBC for the bond, specifying that the money would be allocated to infrastructure projects, was removed. "The clause has been deleted so the government was able to use the money for any project or expenditure which is what they have done," Jayasekera said. He believes the People's Bank is trying to get another US$500 million bond and the Ceylon Petroleum Corporation is also trying to get US$250 million. "It is he first time in history that these kinds of government companies are going for these bonds," Jayasekera said. "Governments normally do but now government-run companies are trying to get these kinds of bonds."

The CB statement last month said that after the receipt of the funds from the bond, a part of the proceeds were utilized to settle bank borrowings up to a sum of approximately Rs.20 billion and another part applied towards the retirement of treasury bills amounting to Rs.8 billion. A further sum of Rs.6 billion was utilized to settle payments falling due in November 2007 in relation to the above stated ongoing infrastructure projects. The banks also said that as a prudential debt management strategy, the government has also, for the time being, utilized the balance sum of approximately Rs.22 billion to reduce the treasury bill stock so as to gain the advantage of the interest rate differential, allowing the government the option of issuing treasury bills as and when funds are required to meet the future funding requirements of the infrastructure projects as identified in the 2007 budget. (NG)