Sri Lanka opts for fixed rate, dollar loan to avoid forex, interest volatility
ECONOMYNEXT – Sri Lanka’s government has decided to obtain a Special Drawing Rights (SDR) loan from the International Development Association in US dollars at a fixed rate with 27 year tenure to avoid foreign currency and interest rate volatility and bunching up of debt repayments.
The Finance Ministry is to enter into an agreement with the World Bank for the IDA loan of 71.3 million SDR, being the equivalent to 100 million US dollars, to be given in a single tranche.
Sri Lanka as the borrower was given different options with the loan either fixed or floating interest rates – LIBOR plus fixed spread or LIBOR plus variable spread – and tenure between 24 to 30 years with five to nine year grace periods.
The island also had the option of the loan being denominated in SDR. US dollar, yen and British pounds if it’s on a fixed rate.
The Cabinet of Ministers has approved the loan by the Ministry of National Policies and Economic Affairs, in charge of the reform program, at a fixed rate with a 27-year tenure in US dollars.
The 27-year tenure which includes an eight year grace period was considered more appropriate as it will help the government avoid bunching of debt servicing during 2019-22 and give time till 2024, easing debt repayment pressure, the ministry said.
The government also considered the fact that although the SDR interest rate is lower than that of US dollars, the cost of swapping between SDR and US dollars will be an uncertain factor. The swap cost does not arise if the loan is denominated in US dollars.
Effective rates for floating rate options are much lower than that of the fixed rate option and the chosen option has the risk that LIBOR may remain less than 1.50% for a long period making the fixed rate more costly.
But the government chose the fixed rate rather than the floating rate option given the uncertainty as
LIBOR fluctuation could be over 1.50% during the tenure of 27 years.
(COLOMBO, June 27, 2016)