AFP reported last week that Sri Lankan officials have been visiting several international financial centers, including New York and Los Angeles this week to promote Sri Lanka’s 10 year one billion dollar bond sale. The lead banks approached by the Sri Lanka officials include HSBC, Bank of America, Merryl Lynch, Royal Bank of Scotland and Barclays Bank, according to the AFP report.
Sri Lanka’s foreign debt has risen rapidly since the end of the civil war in may 2009.
Sri Lankan officials expect their bond rating for this issue to be upgraded from the last bond issue in September 2010, which was also a ten year one billion loan. The new loan is expected to be used to repay expensive debt and to fund an ambitious infrastructure program.
AFP reported that according to the Central Bank Governor, most of the loan would be used to rebuild the war torn north east. While the Governor also had asserted that parts of the earlier bond issues have already been used for the same purpose, political observers say Governor’s statement is not supported by the facts. Even Indian grants for infrastructure projects in the north east, including urgently needed housing for displaced has not been used, Sri Lanka watchers say.
Sri Lankan officials expect an upgrade because of their claims of Sri Lanka’s "impressive economic performance" since the war including its high growth rate of 8.25% and relatively low rate of inflation, and gains in other indicators like tourism, and the stock market.
While these appear as impressive numbers in themselves, there are some underlying fundamental questions—how well do they measure up to the enormous peace economic dividend that was confidently expected at the end of the war, how sustainable are the economic gains, in terms of the economic policies and progress made towards national reconciliation.
The peace economic dividend in Sri Lanka has far fallen short, principally with defense expenditures continuing to remain very high . As a result, the government has been resorting increasingly to foreign borrowing, to not only to finance infrastructure expenditures but also to support normal budget expenditures, and even to repay domestic debt.
Moreover, without the foreign funded infrastructure program, the overall growth rate would have been less impressive. The excessive reliance on foreign borrowing is also hurting economic growth by supporting an unsustainable exchange rate for the rupee, and thereby its capacity to pay foreign loans.
Many of the largest infrastructure projects are politically driven prestige projects. e.g. Hambantota port, second international airport etc., which will generate lilttle foreign debt service capacity. Foreign funded infrastructure projects have also been a major source of corruption in Sri Lanka. U.S. State Department noted in its report on human rights in Sri Lanka released in April 2011 that “official corruption with impunity and lack of transparency were serious problems.”
As for national reconciliation, little or no progress has been made. In fact, the outlook is worse that at the time of last bond issue in September 2010, leading to increasing pressures on Sri Lanka on accountability for alleged war crimes, especially after the UN expert panel called for an international investigation.
It is noteworthy, in this context, that in a Wikileaks cable published by the UK Guardian, the current US Ambassador, Ambassador Butenis, held Sri Lanka’s President Rajapakse and his brothers responsible for the alleged crimes.
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