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Chinese loans will bleed country dry: Harsha de
Silvaf04da2db1122120fb18107Sri Lanka Brief15/09/2014Speaking to
ahead of Chinese President Xi Jinpings visit to Sri Lanka, United
National Party (UNP) parliamentarian and leading economist Harsha
de Silva revealed that the Government was poised to sign loan
agreements amounting to a staggering US$1.258 billion (or Rs.164
billion) at a high interest rate with China during its Presidents
visit. Dr. De Silva highlighted the fact that with our external
debt already at a high level, the new loan agreements will place
Sri Lanka on the fast-track to disaster.Q Can you give a background
about loans and borrowing trends in Sri Lanka?Firstly, what is
really important is for us to find out why we are taking loans and
where the money is going. A loan is an all encompassing term and
there are different types of returns immediate, long-term and no
returns. So when we are taking loans we need to know what the
benefits are.Currently, Sri Lanka is having a historically low rate
of interests. Despite this, the private sector loan growth has
fallen to an all-time low.From this we can see that credit growth
rates have fallen drastically every year. This means that even
though interest rates are at a historic low, the private sector is
not borrowing. Furthermore, fundamentally, loans in the private
sector have been gold-backed such as pawning. Pawning is basically
used to obtain personal loans. They are not investments. Personal
loans do not drive a countrys development process. Loans should be
for agriculture, industrial purposes, tourism and those types of
investments. But what we are seeing here are personal loans to get
through the month.Within that if you look at what are loans being
taken for the standard categories of all the credit that has been
given as of June 2014 by all commercial banks which is 2.5 trillion
rupees the largest chunk is for construction. That is almost 16.5%.
The next is wholesale and retail trade which is 8.3% and next to
that is pawning at 8.1% even after a 40% drop in pawning; if not
pawning would be in second place, right next to construction. For
the food and beverage industry it is only 2.6%, for textiles and
apparel, it is only 4% and for the machinery and equipment industry
it is only 3.5%. Shipping and aviation is 0.4% while agriculture is
just 0.6%. So it is evident that while the borrowings have dropped,
the reasons for borrowing dont indicate economic growth. You cannot
be content with the way it is; it has to change.Now we need to
analyse the construction sector as that is taking up the largest
amount of loans from commercial banks. In simple terms, a lot of
money is being spent on construction. Then, what kind of
construction are we talking about? Individual housing loans are not
increasing but money is invested in various contracts for
government projects. Since the government has taken complete
control of the financial sector, we can see big commercial banks
lending money to the Road Development Authority (RDA) and the Urban
Development Authority (UDA).Q Given the current scenario, lets look
at the large foreign debt that the government is incurring,
especially as a result of the loans from China. Some critics say
that the government is selling our country to China through huge
loans it is taking from China. What are your thoughts about
this?Well, if you look at the past few years, we have been taking
massive loans, particularly from China, which are going into
construction projects. These include the US$1.3 billion for the
hardly-used sea port, then the more than US$300 million for a
little used airport, unused cricket stadiums and perhaps the worlds
most expensive railway tracks and roads, extension of the
expressway, the unbelievable Roads, overpasses and flyovers in the
Hambantota area or the Hambantota Integrated Development Zone.I am
not saying that all the money is being wasted. But very little is
being invested in useful ways while a mind-boggling amount of money
is wasted on ego-boosting, massively corrupt projects in
Hambantota.On August 21 several cabinet papers (numbered 63, 64,
65, 66) were approved within 15 minutes, without any discussion
whatsoever, to borrow a total of US$1.258 billion dollars (164
billion rupees) from China with the arrival of President
Jinping.This is beside the US$1.3 billion unsolicited loan for the
Port City Project (cabinet paper 72).
So, what is this money for?Expanding the Outer Circular Highway
(OCH) from Kadawatha to Kerawalapitiya is being carried out at a
cost of US$520 million of which US$494 million (95% of the cost)
will be in the form of loans from China to be paid back in 15 years
at a very high 2% interest rate plus a 0.25% service charge. That
works out to US$56 million (or 7.3 billion rupees) per
kilometre.Now if you compare that with the Kaduwela-Kadwatha Outer
Circular Highway, again financed by China, the cost per kilometre
was $43 million (or 5.5 billion rupees).The Kottawa-Kaduwela Outer
Circular Highway which was financed by Japan cost 2.4 billion
rupees per kilometre.So it is interesting to note that the
Kadawatha-Kerawalapitiya OCH which is being financed by China is
exactly three times the cost of the Kottawa-Kaduwela component.So
what we are seeing is that these loans from China are being
obtained at a massively inflated cost and at a very high interest
rate.To put things into better perspective, let me draw another
comparison between the loans from China and the loans from
Japan.
1(404)In March this year, we borrowed US$342.8 million from Japan
for the construction of the new Kelani Bridge and that came at a
0.1% interest rate to be paid back in 40 years with a 10-year grace
period. And now we are borrowing from China at more than a 2.2%
interest rate. That means its 22 times higher! Isnt that
ridiculous?Then we are signing a loan agreement with China for the
improvement and rehabilitation of priority roads in Hambantota. The
cost is US$117.6 dollars, of which we are borrowing US$100 million
at LIBOR (approx. 0.4%) plus 2.95%. That works out to about 3.3%
with an additional 0.37% service charge. So altogether, it is well
beyond 3.5%.The next one are roads and flyovers in Hambantota which
is hyped as an international hub. Why do you need flyovers in
Hambantota? This is not a priority. The entire cost of the project
US$252 million will be in the form of a loan from China and again
at a massive 2% interest rate plus a 0.25% service charge.3(242)The
one after will be the extention of the Southern Highway from
Mattala to Hambantota via Andaraweva. Now this is a classic. It is
only 25 kilometres and the cost is US$412.4 million. It works out
to 2.14 billion rupees per kilometre.Compare that with the
Kottawa-Pinnaduwa (Colombo-Galle) Highway which is 95 kilometres
long. That was done at a cost of US$975 million rupees a kilometre.
Now the great big fundamental difference here is that the component
was mainly done with loans from Japan and the Asian Development
Bank (ADB) at a 1% interest rate. This was transparent. Comparing
that with the Mattala component, the cost with the Chinese loan is
120% more!So this gives you a flavour of what is going on with
these loans. While on the one hand credit growth is very slow and
the private sector borrowings have fallen to an all time low, on
the other hand the government is on a desperate borrowing spree
where massive loans are being obtained at hugely inflated costs.
Obviously there is something dramatically and drastically wrong
here.Q If this is the case, why does the government insist on
borrowing from China, knowing that it comes with higher costs and
higher interest rates?Very simply, it is because there are no
transparency conditions with regard to Chinese loans. ADB and JICA
wont give us money unless it is openly tendered. It is a
falsification to say we cant borrow from ADB and other development
partners at lower interest rates. We can! And more importantly, the
cost of the projects would be much lower as well.But crooks have a
huge advantage by not borrowing from the ADB and other sources that
have transparency conditions and to borrow from the Chinese
instead. However, the sad part of all this is the huge disadvantage
to the people, who are finally the losers.I will add one more thing
to this. It is about whats going to be the absolute fraud of the
century. There have been lots of closed-door discussions with
certain people for the refinery expansion project the
state-of-the-art expansion to be done by globally-accepted service
providers which is in the range of about US$1.2 billion. However we
hear that this will be signed at a cost that would include hundreds
of millions of money paid to certain individuals. So we are waiting
to see how much actually would be paid as bribes to get this
project. We dont know yet but we are waiting and we are
watching.So, considering all this, where do we stand as a country
with regard to debt?Well Central Bank Governor Nivard Cabraal says
Sri Lanka can be described as a less-indebted country according to
the Manual on Effective Debt Management. But his former Deputy
Governor, Mr. Wijewardene has completely contradicted him and says
we are a highly-indebted country, according to the same parameters
that Mr. Cabraal has used. It is very sad to see how far the CB has
been politicised to window-dress or massage these numbers and
portray them in a manner which is far from the truth.
Even before the Chinese loan agreements are signed, Sri Lankas
external debt vulnerability is very high already. And getting into
more high-cost external debt is going to be absolutely detrimental
to this country, particularly because the loan payback, if any,
would take a very, very long time to come because they are being
priced at several times the cost.Everything is getting hollowed out
whether it is institutions, whether it is the judiciary, whether it
is the CB, whether it is the regulators so when crunch time comes
it will just crumbleLast month it was revealed that Sri Lanka was
only behind Japan and Lebanon in terms of its debt-to-revenue ratio
which is a staggering 590%. And also interest payment was 38.5% of
revenue whereas the peer-median was 8.8%. In terms of external
debt, which is 60%, Sri Lanka was the highest in the Asia Pacific
region except for Mongolia and Papua New Guinea. So looking at
these globally accepted statistics and figures, it is clear that we
are moving into a danger zone. The Government is falsifying
numbers; it is shamelessly window-dressing accounts and stealing
billions of dollars! This is the peoples money! The economy is
being ripped if not destroyed by these rogues.As someone pointed
out, everything is getting hollowed out whether they are
institutions, whether it is the judiciary, whether it is the CB,
whether it is the regulators so when crunch time comes it will just
crumble, unless we stop these rogues on their tracks
now!Interviewed by Shihara MaduwagePosted byThavam