February 12, 2015 / 4:07 PM / 3 years ago

Sri Lanka's new government looks to restructure expensive infrastructure loans

* New govt says previous administration paid too much for loans

* China has financed most post-war infrastructure projects

* Sri Lanka says a new IMF deal would also cut borrowing costs

By Shihar Aneez and Ranga Sirilal

COLOMBO, Feb 12 (Reuters) - Sri Lanka’s new government is looking to restructure expensive loans, mostly from China, that were taken out by the previous regime for infrastructure projects, ministers said on Thursday.

The new government, which came to power after former President Mahinda Rajapaksa’s unexpected defeat in an election on Jan. 8, has already ordered a review of all the previous government’s projects. It claims the Rajapaksa administration paid too much to borrow money and that some public projects had been agreed without going through proper tender procedures.

The country borrowed more than $6 billion, mainly from China, for a massive infrastructure drive under Rajapaksa after a 26-year civil war ended in May 2009.

Rajapaksa’s government said it needed to push through projects quickly to speed up vital post-war development.

“We have to look at what options are available in the agreements and we should try and reduce the high borrowing cost, obviously with longer-term low cost borrowing,” Harsha de Silva, Junior Minister for Policy Planning and Economic Affairs, told Reuters.

He said that a $306 million loan secured in 2008 from China’s Ex-Im Bank to develop the first phase of a port in the southern city of Hambanthota, since completed, had been signed at a fixed interest rate of 6.3 percent. That was despite an option to go for a floating rate of LIBOR plus 90 basis points.

“If we had a floating rate, we would have been paying 1.3 percent today. But now we are paying 6.3 percent per annum. The fixed rate was due to a request made by the lender. I don’t think we should be paying 6.3 percent on a 15-year loan.”

China financed most of the post-war infrastructure projects, ranging from ports to airports and highways, railways and coal-fired power plants.

Finance Minister Ravi Karunanayake told Reuters on Monday that Sri Lanka is looking to tap international capital markets to borrow up to $1.5 billion through a sovereign bond before the end of April, and also plans to seek a new IMF programme.

A top government official said on Thursday, on condition of anonymity, that the government is looking to borrow $4 billion from the IMF at very cheap rates for balance of payments support.

Central Bank Governor Arjuna Mahendran is currently visiting Washington with a delegation for talks with the IMF.

“We are also asking for development aid (from the IMF),” Karunanayake told reporters in Colombo. “We are asking as a new government that has come in. We want to try and reduce the gap because our debt amortization is roughly about 1.3 trillion Sri Lankan rupees ($9.8 billion) a year.”

He said he expects Sri Lanka could secure IMF loans at an interest rate of around 0.01 percent to 0.5 percent, as “opposed to Chinese loans at 7-8 percent”. (Writing by Shihar Aneez; Editing by Susan Fenton)

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