Stephen K. Green
Chief Executive Officer
HSBC Holdings PLC
8 Canada Square
London E14 5HQ
United Kingdom
Dear Mr. Green,
Government of Sri Lanka USD 500 Mn. Bond Issue
It has been brought to my notice that the Central Bank of Sri Lanka has mandated your bank to issue a sovereign bond for the Government of Sri Lanka with a total value of USD 500 million.
As leader of the Opposition in the Parliament of Sri Lanka, and as the Leader of the United National Party which holds the highest number of seats in Parliament, I consider it prudent to inform you that a debt issue of this magnitude would seriously jeopardise the public finances of Sri Lanka. Moreover, Parliament has not been informed of a bond issuance of this magnitude and it is not at all clear for what purpose the funds raised will be utilised.
In the current volatile conditions in global debt markets, I am concerned that the yield expected by subscribers to a Sri Lanka sovereign bond will be much higher than that obtained in the past. This will hamper the sustainability of Sri Lanka’s long-term programme for servicing its existing public debt repayments and raises the very real prospect of a future default in the servicing of repayments to investors in this bond issue.
Sri Lanka’s external payments situation is deteriorating. The current account deficit of the balance of payments was less than 1 percent of GDP in 2003j it will rise to 5.5% of GDP in 2007. The Executive Board of the International Monetary Fund acknowledged this in a statement issued in late 2006 stating that ‘inflationary pressures are rising, the external current account is widening and reserves are below comfortable levels’. The situation has further deteriorated since that statement was issued.
The Governments of Germany and the United Kingdom have suspended disbursements of confessional aid to Sri Lanka in response to the deteriorating security situation in the country resulting from the resumption of military conflict with the separatist LTTE in the North and East. Other countries including India, the US and Japan have expressed strong reservations about the inability of the Sri Lanka Government to present a reasonable political proposal to resolve the ongoing conflict.
In March 2007, the LTTE bombed Sri Lanka’s only international Airport and have threatened to attack other economic targets in the future. After almost three decades of strife which has taken a severe human and economic toll on the country, I have advocated resumption of negotiations with the LTTE to find a political solution to this horrendous conflict. Even in the Western Province which is away from the conflict zone and which is home to over half the country’s economic activity, events such as the attack on the international Airport have the potential to destabilise economic activity.
As a consequence, the growth of inflows of foreign direct and portfolio investment and remittances of foreign currency from overseas have slowed. The temporary respite afforded by foreign relief aid for victims of the December 2004 tsunami is now abating.
This leads me to believe that the Government of Sri Lanka is attempting to raise these funds to bridge the widening current account deficit, which in turn is caused by the deteriorating finances of the Government. In terms of the Fiscal Responsibility Act of 2003 which the then Government enacted, Parliament mandated the Treasury to bring down the fiscal deficit from 7% of GDP to 5% by 2007. This has not happened. I expect the fiscal deficit to exceed 8% of GDP in 2007 and the proceeds of the aforesaid bond issue will very likely be used to bridge the widening deficit.
Annual inflation in July 2007 rose to 17.6% and is likely to increase Further as rising military expenditure strains Government finances. The Sri Lanka Rupee has depreciated by almost 10% against the US Dollar in the last 12 months even as the greenback itself has weakened. This is causing an intolerable burden on the population in terms of the rising cost of living.
All major infrastructure projects in the country such as the expansion of the Colombo trans-shipment port, the Southern Highway, the Puttlam-Padeniya Highway (already under construction), the Hambantota Port Project and a large Thermal Power Plant at Norochcholai have all been funded by bilateral and multilateral lending institutions such as the Asian Development Bank. I therefore, asked the Hon. Prime Minister of Sri Lanka on the floor of the House of Parliament on 23rd August 2007, as to what purpose lay behind his Government embarking on such an ambitious bond issue. He was unable to answer my question. This raises the question of whether these monies will be used to Fund corruption in Government.
I have placed these facts before you to illustrate the rather precarious economic conditions facing the country at the present time. I leave it to you to decide for yourself, after examining the facts, whether it is prudent for the Government of Sri Lanka to borrow a large amount of resources at commercial terms, especially when global debt market conditions have become markedly unfavourable.
To me it is quite evident that the Government will not be able to service repayments of the proposed bond issue on a sustained basis, given the un favourable security and economic environment in Sri Lanka. For the record, I would also like to state that the United National Party has always been at the forefront of efforts to bring about transparent and effective management of Government finances in Sri Lanka. I must therefore state that it is very likely that the Sri Lanka Government’s unblemished record of honouring all its debt obligations will be seriously jeopardised if this bond issuance goes through. Furthermore, this bond issue is in violation of the law.
It is my duty therefore, to inform you that a future Government formed by the United National Party will not be able to honour the repayment obligations under this bond issue for the reasons stated above.
Yours Sincerely
Ranil Wickremesinghe
Leader of the Opposition –
Parliament, Sri Lanka
Leader – United National Party
1. James Dimon
Chairman and CEO
J.P. Morgan Chase
270 Park Avenue
New York
NY10017
USA
2. Marcus Agius
Chairman
Barclays PC
1 Churchill Place
London E14 5HP
UK
Chief Executive Officer
HSBC Holdings PLC
8 Canada Square
London E14 5HQ
United Kingdom
Dear Mr. Green,
Government of Sri Lanka USD 500 Mn. Bond Issue
It has been brought to my notice that the Central Bank of Sri Lanka has mandated your bank to issue a sovereign bond for the Government of Sri Lanka with a total value of USD 500 million.
As leader of the Opposition in the Parliament of Sri Lanka, and as the Leader of the United National Party which holds the highest number of seats in Parliament, I consider it prudent to inform you that a debt issue of this magnitude would seriously jeopardise the public finances of Sri Lanka. Moreover, Parliament has not been informed of a bond issuance of this magnitude and it is not at all clear for what purpose the funds raised will be utilised.
In the current volatile conditions in global debt markets, I am concerned that the yield expected by subscribers to a Sri Lanka sovereign bond will be much higher than that obtained in the past. This will hamper the sustainability of Sri Lanka’s long-term programme for servicing its existing public debt repayments and raises the very real prospect of a future default in the servicing of repayments to investors in this bond issue.
Sri Lanka’s external payments situation is deteriorating. The current account deficit of the balance of payments was less than 1 percent of GDP in 2003j it will rise to 5.5% of GDP in 2007. The Executive Board of the International Monetary Fund acknowledged this in a statement issued in late 2006 stating that ‘inflationary pressures are rising, the external current account is widening and reserves are below comfortable levels’. The situation has further deteriorated since that statement was issued.
The Governments of Germany and the United Kingdom have suspended disbursements of confessional aid to Sri Lanka in response to the deteriorating security situation in the country resulting from the resumption of military conflict with the separatist LTTE in the North and East. Other countries including India, the US and Japan have expressed strong reservations about the inability of the Sri Lanka Government to present a reasonable political proposal to resolve the ongoing conflict.
In March 2007, the LTTE bombed Sri Lanka’s only international Airport and have threatened to attack other economic targets in the future. After almost three decades of strife which has taken a severe human and economic toll on the country, I have advocated resumption of negotiations with the LTTE to find a political solution to this horrendous conflict. Even in the Western Province which is away from the conflict zone and which is home to over half the country’s economic activity, events such as the attack on the international Airport have the potential to destabilise economic activity.
As a consequence, the growth of inflows of foreign direct and portfolio investment and remittances of foreign currency from overseas have slowed. The temporary respite afforded by foreign relief aid for victims of the December 2004 tsunami is now abating.
This leads me to believe that the Government of Sri Lanka is attempting to raise these funds to bridge the widening current account deficit, which in turn is caused by the deteriorating finances of the Government. In terms of the Fiscal Responsibility Act of 2003 which the then Government enacted, Parliament mandated the Treasury to bring down the fiscal deficit from 7% of GDP to 5% by 2007. This has not happened. I expect the fiscal deficit to exceed 8% of GDP in 2007 and the proceeds of the aforesaid bond issue will very likely be used to bridge the widening deficit.
Annual inflation in July 2007 rose to 17.6% and is likely to increase Further as rising military expenditure strains Government finances. The Sri Lanka Rupee has depreciated by almost 10% against the US Dollar in the last 12 months even as the greenback itself has weakened. This is causing an intolerable burden on the population in terms of the rising cost of living.
All major infrastructure projects in the country such as the expansion of the Colombo trans-shipment port, the Southern Highway, the Puttlam-Padeniya Highway (already under construction), the Hambantota Port Project and a large Thermal Power Plant at Norochcholai have all been funded by bilateral and multilateral lending institutions such as the Asian Development Bank. I therefore, asked the Hon. Prime Minister of Sri Lanka on the floor of the House of Parliament on 23rd August 2007, as to what purpose lay behind his Government embarking on such an ambitious bond issue. He was unable to answer my question. This raises the question of whether these monies will be used to Fund corruption in Government.
I have placed these facts before you to illustrate the rather precarious economic conditions facing the country at the present time. I leave it to you to decide for yourself, after examining the facts, whether it is prudent for the Government of Sri Lanka to borrow a large amount of resources at commercial terms, especially when global debt market conditions have become markedly unfavourable.
To me it is quite evident that the Government will not be able to service repayments of the proposed bond issue on a sustained basis, given the un favourable security and economic environment in Sri Lanka. For the record, I would also like to state that the United National Party has always been at the forefront of efforts to bring about transparent and effective management of Government finances in Sri Lanka. I must therefore state that it is very likely that the Sri Lanka Government’s unblemished record of honouring all its debt obligations will be seriously jeopardised if this bond issuance goes through. Furthermore, this bond issue is in violation of the law.
It is my duty therefore, to inform you that a future Government formed by the United National Party will not be able to honour the repayment obligations under this bond issue for the reasons stated above.
Yours Sincerely
Ranil Wickremesinghe
Leader of the Opposition –
Parliament, Sri Lanka
Leader – United National Party
1. James Dimon
Chairman and CEO
J.P. Morgan Chase
270 Park Avenue
New York
NY10017
USA
2. Marcus Agius
Chairman
Barclays PC
1 Churchill Place
London E14 5HP
UK
