The International Monetary Fund (IMF) cautioned the government for using banks and other financial institutions to borrow overseas on its behalf, as it could pose additional risks to the financial system.
The outgoing IMF Resident Representative Dr. Koshy Mathai said the additional risks could arise due to multiple parties exposing their balance sheets to international capital markets instead of one party borrowing from overseas.
“That (proxy borrowing) can be good and it can also carry risks because instead of just one party borrowing externally, now multiple parties borrowing and the possibility of risk is certainly much higher than just one person (party) borrowing,” he said.
Speaking further, he said if the foreign exchange risk of these proxy borrowings were underwritten by the government, it will demonstrate that “the financial sector development case is much weaker”.
The Sri Lankan government in 2013 used Bank of Ceylon, National Savings Bank (NSB) and DFCC Bank to raise capital from international capital markets on its behalf.
However the Central Bank Governor Ajith Nivard Cabraal recently said that they would issue a sovereign bond next year to raise US $ 1.5 billion. Sri Lanka did not issue a sovereign bond this year.
Dr. Mathai further told he did not see much sense in just proxy borrowing if the foreign risk is underwritten by the government, as it will not develop the financial system in the country to tap capital markets by their own.
“If you (government) are getting institutions to borrow and then covering their FX risk, so they are not really developing themselves to go out on their own, managing new type of borrowings,” Dr. Mathai quipped.
If it is the case, he then asked “why not the government itself borrow?”
However on the positive side, he said exposing banks and other financial institutions to the international capital market could also develop the overall financial sector, but with fresh risks.
“The financial sector liberalization comes with greater opportunity as much as risks,” he said.
Therefore he asked to closely watch the interest rates, match returns to the borrowing cost and to select appropriate borrowing vehicles or institutions, before using proxies.
In contrary, in September this year, National Savings Bank (NSB) raised US $ 750 million through a 5-year dollar bond at 8.875 percent before the Fed tapering fears set the wrong benchmark for the rest of the followers.
Subsequently, DFCC raised US $ 100 million below its US $ 250 million quota at 9.625 percent in October.
NDB Bank did not raise its US $ 250 million, but its CEO Rajendra Theagarajah told the bank would go to the market at the right time at the right price.
However, Treasury Secretary Dr. P B Jayasundera at a recent post-budget forum lashed out at both development banks over their inability to raise funds overseas.