The Borrowing Strategy

Public investment contributes economic growth and overall social welfare of a country. Sri Lanka has been using medium term Public Investment Programs (PIPs), to formalize continuous public investments.  To finance PIPs, Sri Lanka has been channelling finances through both domestic and external sources. Since domestic financial resources and expertise are inadequate to fill the investment gap, and to mitigate the balance of payment pressures generates from public investment, financing arrangements have been made to acquire foreign resources from development partners and lending agencies for last 7 decades, especially for large development projects.

Government has acquired foreign resources in the form of technical expertise, concessional financing, grants, and market borrowings to finance development projects and other financial needs.

However, the risk and cost involved in foreign borrowings has to be managed prudently in order to ensure debt sustainability and minimize the debt burden in the long run, by adopting a comprehensive ‘Borrowing Strategy’ with regular and appropriate modifications in an opportunistic manner. The borrowing capacity of a country depends on a number of factors including the budget deficit, the direction of public investments and repayment capacity of the country. A prudent level of debt management helps sustain the country’s economy against potential shocks arising as a result of unforeseen domestic and international changes in the macroeconomic variables.

The present borrowing strategy of the Government has two basic principles;

a) borrowing at the lowest possible cost and low risk (such as refining, exchange rate and interest rate risks) and,
b) ensuring adequate provision to servicing the existing debt on time.

In line with these principles, the following strategies are being adopted by the Government to mobilize external financing for development projects/programmes in the country -

  • Explore the possibilities of obtaining  concessionary and  non - concessionary funds at a minimum cost and lower risk for financing development projects.
  • Pay more attention to the sectors which generate cash flow when raising funds for the fields which are directly related to improving economic infrastructure facilities and productivity in the economy.
  • Obtain loans with a longer repayment period, maximum grace period and favourable Grant Element .
  • Assist the  state owned enterprises to improve their assets by encouraging them to obtain loans directly from external sources under government guarantees.
  • Use the Capital Market through alternative methods such as the issuing of Sovereign Bonds.

ERD Formula

With regard to development projects, given the fact that the amount of concessional financing is in decline with the elevation of Sri Lanka to the status of a lower middle income country, the foreign financing options for public investment have been broadened by tapping new financing sources as well as considering a proper mix of less or non-concessional financing with the available concessional financing. This has led Government to carefully select the economically viable development projects to be financed from external borrowings at non concessional and commercial terms.

As an integral part of the borrowing strategy, the foreign borrowings and debt services related indicators and their expected variations due to the potential changes of other macro-economic variables are continuously being monitored, reviewed and updated regularly by the relevant agencies including the Treasury and the Central Bank of Sri Lanka. This helps to maintain an appropriate debt position under periodic economic changes and shocks in the domestic and international arena. The entire debt portfolio is analyzed in terms of commitments, disbursements, total debt accumulated and debt servicing in relation to a defined debt sustainability analysis. The Standard Debt Ratios derived from these analyses give an idea about the potential impact of future borrowing on the economic situation of the country. The derivatives are also used to determine the accepted burrowing limits or thresholds as well as for inter country comparison. Based on these indicators which are regularly updated, proactive measures are being taken to minimize the risk of the country’s indebtedness and credit rating.

The existing borrowing strategy helped Sri Lanka to fulfil its entire debt service obligations on time despite of the risks stemmed from global economy.

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