6/16/2010

Sri Lanka further into the debt crisis

(June 16, 2010, Colombo - Lanka Polity'Sri Lanka government has plans to sell $275 million of dollar-denominated bonds locally this month to pay for maturing debt.

Three months ago, Sri Lanka failed to raise a targeted $100 million through a debt auction.

The Central Bank of Sri Lanka will issue $175 million of two-year debt and $100 million of three-year paper, the Central Bank of Sri Lanka said on its website.

Subscriptions for the so- called development bonds close on June 18.

The nation raised $92 million by selling development bonds through competitive bidding in March, and the central bank subsequently raised $8 million through placements that month.

Sri Lanka's public debt repayments and interest is amounting to 767 billion rupees this year. It is 44 percent of the overall budget expenditure of 1,780 billion rupees.

Last year government debt hit 4.1 trillion rupees. Of it, 1.8 trillion rupees was foreign debt, a 22 percent rise, according to Central Bank annual report: “The ratio of debt service to government revenue increased further to 117.5 percent from 90.5 percent.,” the report said. Total debt servicing rose by 39 percent to 825.7 billion rupees in 2009, including a huge interest payout of 309.7 billion rupees that comprised 26 percent of total expenditure.

World Bank Director for South Asia Ernesto May launching the World Bank’s South Asia Economic Update 2010 in Colombo last week noted: “South Asia has very high levels of public debt—over 60 percent of GDP for the region. As seen in Europe with markets focusing on highly indebted countries, markets will start penalising those with high debt.” He pointed out that Sri Lanka’s debt was the second highest in the region after the Maldives—increasing from 81 percent of GDP in 2008 to 86 percent in 2009.

Out of this massive debt services burden, 36.5 percent is for foreign debt. Sri Lanka should target investment led growth and minimize borrowings which could lead to a future debt crisis, former Malaysian prime minister, Mahathir Mohamed said. "Don't depend too much on loans, the better thing of course is to invite foreign investors to come in and create jobs and bring in capital into the country," Mohamed told reporters at a media briefing in Colombo.

Allocations for health and education were as low as 52 and 46 billion rupees respectively—a total of 10 billion rupees less than for 2009. The budget for 2009 was itself 12 billion rupees lower than the amount for 2008. The combined allocation for health and education this year is less than half of defence expenditure in 2010.

The government promised an IMF team in May that it would considerably reduce recurrent spending. It intends to cut government subsidies to the Ceylon Electricity Board, Petroleum Corporation, Central Transport Board, railways and postal services. Total losses in these sectors amount to 49 billion rupees and can only be reduced by axing jobs, cutting wages and increasing prices.

Meanwhile, the defence budget at 202 billion rupees ($US1.8 billion) or 21 percent of the total expenditure of 974 billion rupees allocated to government ministries. At a convention of public sector trade unions that are under Trade Union Confederation last week, Joseph Stalin Fernando, the national organizer of the trade union coalition argued that the government is increasing defense expenditure to suppress the workers' struggles.

However, the trade unions failed to gather the expected number of participants to the convention and some trade union leaders expressed wonder why the workers were so unresponsive in a time the government is breaking the promise of Rs. 2500 per month salary hike for public servants.

(Sources: World Socialist Website, Lanka Business Online)

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