ECONOMYNEXT – China was the top lender to Sri Lanka for the first four months of 2021, disbursing 514.9 million US dollars including a 500 million budget support loan, slightly down from a year earlier, official data shows.
In the first four months of 2020, China also gave 568.4 million dollars including a 500 million dollar budget support loan from China Development Bank which was the first tranche of a 1.2 billion dollar loan.
Up to April 2021, the World Bank gave 134.4 million dollars in loans and 0.6 million in grants, up from 775 million dollars last year.
The Asian Development Bank gave 113.6 million US dollars up from 95.9 million dollars last year.
The Asian Development Bank and the World Bank has ramped up lending to Sri Lanka in a Coronavirus pandemic, re-directing parts of already approved loans and entirely new loans to help build hospital capacity, PCR testing labs and vaccine purchases.
Agencies such as the World Bank find it difficult to give budget support loans without debt sustainability sign off from the International Monetary Fund, persons familiar with the process say.
Sri Lanka has generally shunned budget support loans after 2005 as the country embarked on a path of import substitution, economic controls to give high profits to so-called crony rent-seeking firms as well as state-led development.
World Bank budget support loans require economic liberalization for private citizens to work, compete and earn tax revenues for the state so that the loans could be repaid.
Import substitution firms on the other hand earn profits by diverting trade taxes to their own bottom line in a practice known as tax arbitrage.
Sri Lanka had said it will limit foreign borrowing as difficulties emerged with repaying foreign debt amid greater monetary instability in recent years.
Sri Lanka has seen higher levels of monetary instability with the central bank becoming more active particularly after 2015, injecting large volumes of money under discretionary ‘flexible’ policies leading to falls in the credibility of a peg with the US dollar and output shocks. (Colombo/July07/2021)