Sri Lanka repays Rs70bn in contractor arrears, bonds to banks for subsidies

ECONOMYNEXT – Sri Lanka has repaid about 70 billion rupees of arrears to private construction firms in March and an overdue interest subsidy of 40 billion rupees will be settled after raising fresh debt or through a bond, Central Bank Governor Indrajit Coomaraswamy said.

"The Treasury has paid about 70 billion rupees in overdues to the construction industry," Coomaraswamy said.

There were about 20 billion rupees arrears remaining, he said.

Sri Lanka’s construction firms have got into difficultly over non-payment of dues and MTD Construction, a troubled listed company has blamed delays in settlement of government contracts for its financial difficulties.

Sri Lanka’s growth reduced to 1.8 percent in the fourth quarter from a year earlier, with a contraction seen in the industrial sector due to a construction slowdown.

The repayment of loans by indebted contractors may reduce total private credit and may also cut some bad loans of banks, analysts say.

In January, Sri Lanka’s private credit became negative amid falling growth after the central bank generated monetary instability by printing money in April, which then led to a currency collapse and liquidity shortages in trying to bring back stability.





Meanwhile Sri Lanka’s Treasury has also promised to repay an interest subsidy for ‘senior citizens’ who are paid an above market rate.

"For the senior citizens interest subsidy, there are arrears of about 40 billion rupees," Coomaraswamy said.

"So, the government is planning to give a 5-year loan and to repay it in monthly installments to the banks or to issue a bond."

Running arrears may understate budget deficits of the year in which the payment fell due, as Sri Lanka operates budget on a cash basis.

However cash basis budgets, unlike accrual budgeting, reflects the exact impact of the deficit on the credit system, therefore interest rates, and also monetary operations of the central bank, which may respond to cashflow movements and rates.

 There are moves afoot to publish budgets on an accrual basis.

 Accrual budgeting will generate a disconnect between the official deficit and its impact on the economy, in the same way as income statements do not reflect the actual cash activities of a company, analysts say. (Colombo/Apr11/2019-SB)


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