Govt to stop excess borrowing, eyes cheap funds after IMF deal

(Reuters)- Sri Lanka will stop excess government borrowing in a bid to get out of a debt trap and it hopes for cheaper loans after a deal with the International Monetary Fund is finalised, its central bank chief said on Tuesday.

Sri Lanka is facing a looming balance of payments crisis because of a foreign outflow of about $2 billion from government securities since January last year and is in a debt trap, partly due to heavy infrastructure borrowing by the past government.

The government in March announced an increase in value-added tax and the reintroduction of capital gains tax, while it has asked China to swap some of the $8 billion it owes to China for equity.

"Now the government has consciously decided not to borrow excessively. The thrust of the economic activity is going to be private investment," the governor of the central bank, Arjuna Mahendran, told reporters in Colombo. The previous government had "over borrowed", he said.

"There is not much room left for the government to continue this borrowing spree to fund large projects." Sri Lanka is in negotiations with the IMF for a three-year loan programme. The IMF said on Monday it expected to complete negotiations in the next two weeks.

Mahendran said the loan was likely to be in the range of $1 billion-$1.25 billion and the government was also planning to raise up to $1 billion by selling sovereign bonds in Renminbi. The government's foreign borrowing requirement for this year is about $2.5 billion.

"We can, on my assessment, get renminbi financing below 5 percent rate of interest on an annual basis. This is typically much cheaper than U.S. dollar financing in the current market," Mahendran said. He said the authorities also wanted to establish a benchmark Sri Lanka sovereign issuance in the offshore Chinese bond market.

An IMF deal would help boost investor confidence in the $82.2 billion economy with fiscal prudence measures and good governance principles and that could help the yield in current Sri Lankan sovereign bonds to fall, Mahendran said.

"Once we get an agreement with the IMF, I am expecting the yields to fall down to sub 7 percent level and then we can raise the money very easily. There is a lot of liquidity in the market."