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Sri Lanka Pushes Foreign Borrowings to Spur Growth, Cabraal Says

Sri Lanka is encouraging lenders and companies to borrow in foreign currencies in 2013 as it seeks to revive economic growth from the slowest pace in three years, Central Bank Governor Ajith Nivard Cabraal said.

One state bank is already preparing to sell international bonds guaranteed by the government as part of a plan to tap overseas capital markets to supplement domestic savings and fund expansion, he said in an interview in his Colombo office on Feb. 5. Policy makers are aiming for a 7.5 percent increase in gross domestic product this year, compared with an estimated 6.8 percent last year that would be the slowest since 2009.

“We are looking at expansion of the economy so we don’t fall into the middle-income trap,” said Cabraal. “We have identified that, for the growth momentum we are looking at, we need to have a certain quantum of savings. That quantum of savings is certainly not going to materialize locally.”

The island nation’s economy grew an average 8.5 percent annually in the two years after the end of a civil war in 2009, before decelerating in 2012 as a global slowdown hurt the nation’s exports. Sri Lanka’s government sold $1 billion of 10- year dollar-denominated bonds last year at a record-low yield, which was its fourth global offering since the three-decade old conflict came to an end.

The Bank of Ceylon, People’s Bank and National Savings Bank are the three biggest state-owned banks in Sri Lanka.

“We have upfront stated the sovereign won’t be moving into the markets this year,” said Cabraal. “So we provide the entire space to the corporates as well as the banks.”

Debt Ratings

The government sold dollar bonds due July 2022 at 5.875 percent in 2012, lower than an initial guidance of 6.125 percent and the 6.25 percent rate it paid on similar-dated debt a year earlier. Standard & Poor’s rates the notes B+ and Moody’s Investors Service ranks them B1, both four steps below investment grade.

“Debt investors have locked in rates which suggest their perception is much better than our ratings would suggest,” said Cabraal, adding policy makers are stepping up efforts to almost double the size of the economy to $100 billion in three years. “Although there is very good response, our credit rating is not as high as we would like it to be.”

The yield on Sri Lanka’s 2022 securities climbed 29 basis points, or 0.29 percentage point, this year to 5.26 percent, according to data compiled by Bloomberg. The average yield on Asian dollar debt added 31 basis points in the same period to 3.73 percent, according to HSBC Holdings Plc data.

IMF Loan

Local lenders raised $973 million in long-term dollar loans in the first 11 months of 2012, according to central bank data. Sri Lanka, which last year received the final tranche of a $2.6 billion loan from the International Monetary Fund, is in talks for a so-called extended fund facility.

“Our preference will be that we would have an area of budget support which certainly would be cheaper than if we go to the markets,” said Cabraal.

The governor said the outlook for the nation’s monetary policy has turned “dovish” as the pace of consumer-price gains is expected to slow to “mid-single digits” by the end of 2013. Sri Lanka’s inflation was 9.8 percent last month, the highest among 17 Asia-Pacific economies tracked by Bloomberg. Cabraal kept interest rates unchanged at a January review after cutting them by a quarter percentage point in December.

“We don’t want to have a yo-yo effect in our policy and want to manage it in a steady manner,” said Cabraal. “The overall view is that this is a time to relax policy. We will make a careful call on the timing.”

To contact the reporters on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net; V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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