Dec 19 (Reuters) - Sri Lanka said on Friday it is looking at “alternate sources” of foreign borrowing after a sovereign rating cut this week that analysts expected would drive up the cost of loans.
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Sri Lanka, weighed down by the cost of a campaign against separatist rebels, needs $2.1 billion in foreign borrowing for 2009, out of which $500 million would be on commercial terms. It also has to repay $1 billion on its external borrowings in 2009.
Here are Sri Lanka’s options:
MORE BILATERAL LOANS
Sri Lanka can negotiate for more bilateral loans, especially from India, China and other friendly countries. But analysts expect it to get those on commercial terms instead of the current concessionary rates. Analysts also expect the government to strike a deal with Middle Eastern countries led by Iran to win postponements in payments for oil.
MAXIMUM USE OF CONCESSIONARY LOANS
Sri Lanka could ensure maximum use of funds from donor agencies like the World Bank and Asian Development Bank for development projects. Analysts say that, in the past, Sri Lanka has not used concessionary loans allocated by the World Bank and ADB in full because of a lack of sound projects.
Most analysts and economists say Sri Lanka could seek conditional funding from the International Monetary Fund (IMF) for around $2 billion. But that is viewed as a last resort. The central bank has said the government would never apply for an IMF loan unless the international lender accepts the island nation’s economic plans as they are.
But many analysts say the central bank's decision to depreciate the rupee LKR= was a move to bring it in line with one of the IMF's requirements for funding. The bank has said it allowed depreciation to help exporters.
RE-ATTRACTING FOREIGN INVESTORS
Foreign investors in Sri Lanka’s T-bill and T-bond markets, where returns are around 20 percent, withdrew in the face of the global financial crisis and over-valued rupee. If the central bank could ensure a stable rupee and attractive returns, foreign investors could come back. But analysts said the ultimate outcome of an oil hedging deal, in which the supreme court suspended payments owed by the government to the five banks involved, will be critical in giving a signal to investors [ID:nCOL356922]. (Compiled by Shihar Aneez in Colombo, Editing by Christian Lowe)
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