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Apr 22, 2017

Sri Lanka’s investors complain of high financial costs

Sri Lanka’s investors are in a dilemma owing to high financial cost for their ongoing and proposed projects as a result of the borrowing rate hike to a new high at present, several local and foreign investors complained.

Some of the ongoing and proposed mega projects will have to be halted midway due to high finance costs, they warned.

Two years ago, the borrowing rate was around 8.5 per cent and this was on the basis of Average Weighted Prime Lending Rate (AWPLR) of commercial banks in Sri Lanka plus 2 per cent, they said.

Currently, on the same basis the borrowing rate works out to around 15 per cent and this is over an 80 per cent rise on financial cost from what it was two years ago, they pointed out.

“Any project commenced two years ago has to pay the additional 80 per cent on financial cost where project sensibilities, etc would have been based on a much lower rate,” a leading Colombo mega project investor said.

This leaves investors who have already commenced projects as well as new projects in a dilemma, he claimed.

The Central Bank has increased the standing deposit facility rate (SDFR) and the standing lending facility rate (SLFR) recently.

It has tightened monetary policy three times since December 2015, while the government has kept a tight leash on fiscal policy in the past year to trim the budget deficit in line with a condition for a US$1.5 billion International Monetary Fund loan.
In creating economic activity and development within an economy, maintaining interest rates at reasonable levels provides the required impetus, an economic analyst said  adding that it also facilitates creation of employment opportunities.
 
He noted that currently offshore borrowing could be arranged through reputed financial agencies for less than 5 per cent per annum which is almost 1/3rd of what is paid locally, he revealed.
 
The risk factor to be considered is the depreciation of the Rupee. However if the earnings are to be in foreign exchange, the risk will be minimized, he said.
 
Foreign lenders will provide project financing against a Bank Guarantee (BG) from a reputed local bank.
 
Developers could pledge assets with the local banks as collateral to obtain the BG's. However such bank guarantees will provide an interest rate of less than 1.75 per cent. It means that project funding will be available for a financial cost of around 6.75 per cent (5 per cent +1.75 percent), he opined.
 
Under this set up, the government’s effort to allow offshore borrowings up to $50 million as per CB guidelines is aimed at assisting developers, he observed.
 
However investors complained that some finance companies have been given privileged status and offshore funding could be lined up for projects only by working through such finance companies.
 
Many instances have been quoted where investors/ developers have channeled foreign exchange through the normal banking channels based on open invitation of the government only to find that such funds are frozen with a barrage of questions, etc which has discouraged investment in Sri Lanka.

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