Dr. Harsha de Silva calls for Government explanation on high loan interest rates

Friday, 5 August 2011 01:07 - - {{hitsCtrl.values.hits}}

UNP MP Dr. Harsha de Silva yesterday called for an explanation from the Government on why Sri Lanka has to pay 6.3% fixed interest when the original amount should have been 1.3% on the Hambantota Port investment.

He charged that the Government had not built in relevant clauses to protect the country and that he would continue to probe other deals with the Chinese to see if exorbitant interest rates were charged.

Referring to an interview that was given by Sri Lanka Ports Authority (SLPA) Chairman Dr. Priyath Bandu Wickrama, the well-known economist issued a press release pointing out that the Sri Lankan public would be called upon to pay an enormous amount of interest on the Chinese loan for the Hambantota Port .

Dr. Harsha...

“New evidence suggests that the amount could have been much lower; almost 80 per cent lower, going by today’s global interest rates, if the Government stayed with the originally agreed terms and conditions,” the MP asserted. “The question is, why were terms changed? Is any action being taken to take advantage of falling global interest rates?”

According to the Government, the interest rate without commitment fees and other charges on the US$ 306 million loan agreed in 2007 for the first phase of the Hambantota Port, without the additional cost of U$D 148m including US$ 45m to blast the bedrock, has been fixed at 6.3 per cent per annum, he insisted.

“This loan to EXIM Bank of China is repayable in two semi-annual instalments over 11 years including one year’s grace and the first payment is to be paid soon, as revealed in Parliament recently. It has now come to light, as stated by Dr. Priyath Bandu Wickrema, that the original interest rate was LIBOR, that is the London Inter Bank Offer Rate, the commonly used benchmark for international borrowing, plus a premium of 90 basis points (100 basis points makes one percentage point). LIBOR has continued to fall since the time the loan was agreed upon and today it is at just 0.43 per cent per annum.” (Refer graph)

This means the EXIM Bank loan interest if calculated using today’s rates should be 0.43 per cent plus 0.90 percent, which is 1.33 per cent per annum, de Silva insisted.

“This 1.33 per cent must be compared to the agreed 6.30 per cent. The latter amount is almost an unbelievable five times more than the former amount. The question that arises is, who changed the original decision to lock Sri Lanka into such unfair terms and conditions? It seems that, like the oil hedging agreement, the Government has bungled this agreement with China EXIM Bank. Or is it that the favourable conditions were passed on to China for other considerations?”

Given what he termed as the “grossly unfair agreement,” he questioned as to why the Sri Lankan Government did not have a built-in option. “This is a common risk mitigating derivative instrument. It can be used to move out of this almost usurious 6.3 per cent rate and revert to the original LIBOR + 0.90 per cent rate. If not, why not? This could just be the tip of the iceberg. There could be many other high interest loans negotiated when in fact rates could be much lower. While we ask the Government to respond to us on this matter, we will continue to look in to the conditions of dozens of other Chinese loans that seem to be our standard financing model today.”