In the backdrop of state owned National Savings Bank (NSB) going in for a US $ 1 billion international bond sale, analysts have pointed out that the government is using the country’s banking sector to cover its finances, particularly to reduce a massive budget deficit.
According to reports the international bond issue of the National Savings Bank would take place later this month or early next month and HSBC, Citibank NA and Barclays will act as the lead managers.
Mirror Business, the financial section of the Daily Mirror exclusively reported a few weeks back that National Development Bank (NDB), a designated development financier and a listed entity in the Colombo Stock Exchange, was planning to raise US $ 250 million via a corporate bond issue as well.
The Budget 2013 proposed a window for NDB and DFCC, the other designated development financier in the country, to raise long term foreign development finance up to US $ 250 million each, to provide long term funding for Small and Medium Enterprises (SMEs), plantations, construction industry and other manufacturing industries.
President Mahinda Rajapaksa as the country’s Finance Minister stated that underwriting foreign exchange risk of such bond issues would be borne by the government.
According to analysts, it is unlikely that the private sector in the country will have the appetite for large sums of funds raised from overseas sources, and predicts that majority of the money would likely to be channeled to the government mainly by way of swap arrangements.
However, some analysts are of the view that banks raising dollars through bond issues would mitigate the crowding out effect in the private sector to a certain extent if these funds were drawn by the government through investments in Treasury bills and bonds, with the forex risk being underwritten by the government, until these funds were put into intended use.
This is particularly important at a time when the total domestic financing of the Budget 2013 is estimated to rise 62 percent Year-on-Year to Rs.421 billion probably due to non-bank borrowings (consisting largely of Treasury bonds and bills) of Rs.289 billion (vs. an avg. of Rs.62bn over the past two years) indicating the government’s desire to rely more on domestic financing to bridge the deficit.
Responding to a question raised by the Daily Mirror , the International Monetary Fund a few weeks back said the achievement of the projected budget deficit target of 5.8 percent of GDP for 2013 would be extremely challenging amidst overly optimistic and the falling revenue targets currently at the lowest in the region at 11.5 percent of GDP.
Earlier this month, the government turned down an IMF-follow up program amounting to over US $ 1 billion as a result of IMF’s refusal to provide funds as budget support. (IS)