The Borrowing Strategy

Financial borrowing by a country either from domestic or foreign sources is an integral part of the economic process and is a common situation in current economies. However, in order to ensure debt sustainability and minimize the debt burden, a country needs to adopt a comprehensive ‘Borrowing Strategy’ with regular and appropriate modifications in an opportunistic manner.

The borrowing limit 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,

Given the fact that the amount of concessional financing is in decline with the elevation of Sri Lanka to the status of a 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. The entire debt portfolio is analyzed in terms of commitments, disbursements, total debt accumulated and debt servicing in relation to a defined time framework. 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 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.

In order to achieve the economic targets set out in the economic policy strategy of the government within the stipulated time frame, while maintaining the country’s debt position at an acceptable level, the existing borrowing strategies are being reviewed and updated regularly by the relevant agencies including the Ministry of Finance 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 present borrowing strategy of the government depends on two basic principles;

(a) borrowing at the lowest possible cost and

(b) ensuring adequate provision to servicing the existing debt on time, preserving the default free status of the country.

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

• Explore the possibilities of obtaining  concessionary and  non - concessionary funds at a minimum cost when 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 long repayment period  (15 years in general) with minimum of a 5 year grace period
• When raising external funds by the Government, assist the  state enterprises to improve their assets by encouraging them to obtain loans directly from external sources through the issue of government guarantees
• Finance the Capital Market through alternative methods such as  the issue of Sovereign  Bonds

Government will continue to tap the full amount of external funding available under concessional financing terms. With a higher per capita income level, the external financing at concessional terms will diminish gradually and financing in the form of mixed credit and Export credit will take prominence in future.

In addition, Sri Lanka will tap capital market financing with the issuance of sovereign bonds from time to time.

The Legal and Institutional Framework

The legal and Institutional Framework Relating to Raising of Foreign Finance

Borrowing from foreign sources is an integral part of the development financing of most countries in the world including Sri Lanka. However, the amount of foreign borrowings is carefully determined by the government taking in to consideration the long-term perspective of socio economic benefits of borrowing and the debt servicing cost. Also, the amount of foreign financing that government can borrow in a particular financial year is governed by a well-defined legal and institutional framework and the exposure limit of the country.

Legislative Framework

Legislative Framework refers to the laws, executive orders, and other legal instruments that set the ground rules for government activities related to foreign financing. The legal arrangements define authorities, responsibilities, and roles of organizations in this regard and describes policies, practices, processes and the assignment of authorities and responsibilities to institutions, and the creation of institutions or mechanisms for coordination or collaborative action.

The existing legal framework comprise of a number of Parliamentary Acts including, the Foreign Loan Act No 29 of 1957, Appropriation Act inter alia,Monetary Law Act and the Fiscal Management (Responsibility) Act No.3 of 2003.The Appropriation Act inter alia sets the overall exposure limit of Government Gross borrowings and although there is a high demand for foreign financing from various economic sectors, the specified borrowing ceilings cannot be exceeded under normal circumstances.

Important Laws relating to Foreign Financing and Debt Management

Institutional Framework

The institutional framework is designed to ensure effective mobilization of foreign resources and sustainable management of debt in the country. This institutional framework is comprised of organizations, institutions in the government with a recognized role to play in budget financing and debt management and the mechanisms for coordination among organizations and institutions.

Total commitment for Development projects 2007-2016 - (* charts needs to be updated)

Commitment Trend

This session is under construction