Annual Report 2010 - Ministry of Finance and Planning

5 | FOREIGN FINANCINGOverviewThe composition and the formof foreign financing havesubstantially changed over thelast few years with the graduationof Sri Lanka to a middle incomeeconomy. In parallel to the steadyincrease of per capita income level,Sri Lanka has gradually disqualifiedfor the concessional externalassistance generally available for lessdeveloped economies.With the reduction of concessionalfinancing, steps have been takento broaden the options for foreignfinancing for public investment bymobilizing a mix of commercialcredit and non concessional fundswith concessional funds through theDepartment of External Resourcesand the Department of Public Debtto keep the cost of borrowing ataffordable level.A greater focus was made on theneeded large investments for thepriority sectors such as energy,roads including highways, portsand aviation, irrigation and watersupply schemes to increase return oninvestments to match the change coststatus of foreign debt. At the sametime, the required resources for thedevelopment of lagging regions wereprovided to ensure balanced regionaldevelopment with diversity. Underthis new financing strategy, Chinaand India have emerged as two leaddevelopment partners providing 15-20years long term funds while ADB, IDA,Japan, and UN agencies continuedtheir support for the country'sdevelopment efforts including for therehabilitation and reconstruction in theNorth and East.Providing concessional funds, SouthKorea, Saudi Development Fund, andKuwait Fund continued their annualdevelopment assistance to Sri Lankawhile Government of Iran and Russiaalso extended new developmentassistance. Such funds are availablefor 15 year maturity with LIBOR+0.5percent interest.The country has taken steps toapproach non-concessional window ofthe World Bank – International Bankfor Reconstruction and Development(IBRD) to expand financing options.The borrowings from the AsianDevelopment Bank (ADB)’s nonconcessional financing portion orOrdinary Capital Resources (OCR)have gradually increased last fewyears. In addition, Sri Lanka hassuccessfully tapped capital marketfinancing with issuance of long termsovereign bonds commencing from2007 with advantages of having thestability of the foreign exchangerate of the country, favourablemacroeconomic fundamentals andaccess to low interest structureprevailed in the international capitalmarkets.The total new commitments made bydevelopment partners during 2010increased by 32 percent reachingUSD 3,261 million surpassing thecommitments of USD 2,221 millionin 2009. Of the total commitments,debt finance accounted for USD 2,119million, grants finance accountedfor USD 124 million and exportcredit facility accounted for USD1,018 million. Over 68 percent ofthe new commitments in 2010 werefor the development of economicinfrastructure of which nearly 50percent was for reconstructions ofroads and railway lines in the NorthernProvince. This underscores theGovernment’s strong commitment fordevelopment of infrastructure withspecial attention on the reconstructionand rehabilitation to revive theeconomy of the northern region.The total foreign financingdisbursement during 2010 wasUSD 2,121 million. It was 30 percentincrease compared to the totaldisbursement of 1,633 million in2009. This consisting of 93 percentof project loans and the balance 7percent of foreign grants.The planned strategy to raise GDPgrowth rate to above 8 percentover the next 6 year period is wellunderway with a target of 6-7percent of public investment ratio.This investment will be financedthrough a durable blend of externalfinancing with concessional and othertype of financing while ensuringimprovement of debt sustainability.The government is making allavailable options to enhance theforeign financing resource envelopto support the ongoing developmentprogramme, exploring the renewedopportunity for acceleratingcountry’s overall development afterthe reunification of the country underone umbrella.244