VZCZCXRO3949
RR RUEHLMC
DE RUEHLM #0550/01 0960634
ZNR UUUUU ZZH
R 060634Z APR 06
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 3044
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHNE/AMEMBASSY NEW DELHI 9458
RUEHKA/AMEMBASSY DHAKA 9075
RUEHIL/AMEMBASSY ISLAMABAD 5964
RUEHKT/AMEMBASSY KATHMANDU 3998
RUEHCG/AMCONSUL CHENNAI 6509
RUEHLMC/MILLENNIUM CHALLENGE CORP

UNCLAS SECTION 01 OF 02 COLOMBO 000550 
 
SIPDIS 
 
STATE FOR SA/INS; MANILA FOR USADB; MCC FOR D NASSIRY AND E 
BURKE 
 
SENSITIVE, SIPDIS 
 
E.O 12958: N/A 
TAGS: EFIN ECON CE
SUBJECT:  SRI LANKA PLANS FIRST SOVEREIGN BOND ISSUE; MAY 
RETIRE DEBT AND FUND INFRASTRUCTURE 
 
¶1.  (U) Summary:  For the first time, the Government of Sri 
Lanka (GSL) intends to raise funds through a sovereign bond 
issue.  Traditionally, Sri Lanka has avoided large-scale 
borrowing from the international capital markets, relying on 
concessionary donor financing and local borrowing to fill 
its financing gaps.  Sri Lanka has been forced to borrow 
from the markets since it chose to abandon the economic 
reforms program of a prior government and the related IMF- 
supported Poverty Reduction Growth Facility (PRGF), thus 
foregoing International Monetary Fund (IMF) and World Bank 
budgetary support.   Central Bank sources say the new funds 
would go to retire high-cost commercial debt and fund 
infrastructure projects.  End Summary. 
 
¶2.  (U) The GSL has appointed Citibank to raise between USD 
500 million and USD 1 billion through a sovereign bond 
issuance.  While this will be the first sovereign bond issue 
offered to the international market by the GSL (previously 
it had issued dollar denominated bonds locally to non- 
residents and banks), it is the third time the government 
will seek foreign currency borrowing since receiving its 
first sovereign ratings of BB-minus and B-plus (both sub- 
investment grade) from Fitch and Standard and Poors (S&P), 
respectively, in December 2005.  The bonds will have 
maturities from 7 to 10 years.  The interest rate is not yet 
known.  According to Kapila Jayawardena, Chief Executive 
Officer of Citibank NA Colombo, who spoke with EconFSN in 
mid-February, the interest rate would be higher than the 
rate of LIBOR-plus-95 basis points (LIBOR-plus-0.95%) at 
which Citibank raised USD 100 million in the GSL's three- 
year syndicated loan offer in December 2005 as maturities of 
the new issue are longer.  According to Jayawardena, the 
bonds will be rated prior to issuance and are likely to 
receive ratings similar to the GSL's sovereign ratings 
(Note: for rough comparative purposes, similarly ranked 
countries, such as Indonesia and Vietnam, have issued bonds 
with spreads ranging from LIBOR-plus-283 to LIBOR-plus-388. 
End Note). 
 
¶3.  (U) Citibank is in the initial stages of planning the 
bond issue.  The bonds are likely to go on sale in May 2006 
and will be marketed to financial institutions abroad, 
including banks and insurance companies. 
 
¶4.  (SBU) The government has not yet officially announced 
the intended use of these funds.  Treasury Secretary P. B. 
Jayasundera told reporters on February 3 that he wants to 
test the market as Sri Lanka is bound to lose access to 
donor funds in the future due to rising per capita GDP 
(Note: Jayasundera leaves unstated that the GSL's options 
with donors are increasingly  limited, due to GSL 
unwillingness to move forward on fiscal reform. End Note). 
Jayasundera also suggested the possibility of rolling over 
high cost debt, but failed to give specific details.  Deputy 
Governor of the Central Bank Rani Jayamaha told EconOffs on 
February 9 that funds from the bonds would go to settle part 
of the government's expensive commercial debt including debt 
owed by quasi-government institutions such as the Ceylon 
Petroleum Corporation.  They may also be used to fund 
infrastructure projects not funded by the donors.  Domestic 
borrowing limits were also cited by Jayamaha as a reason for 
raising foreign funds.  Parliamentary approval is needed to 
increase the domestic borrowing limits and the government 
does not want to seek parliamentary approval frequently.  A 
US Treasury advisor posted in Sri Lanka may be asked by the 
GSL to become involved with this issuance. 
 
¶5.  (SBU) Comment:  The GSL's first sovereign bond issue 
(along with the Nation Building Bonds opened to Sri Lankan 
expatriates (septel)) reflects substantial borrowing from 
international markets (about 4.5 percent of GDP) to fund 
increasing GSL deficits.  The projected 2006 deficit has 
increased by 23 percent to Rs 247 billion (approximately 
$2.5 billion) equivalent to 9.1 percent of anticipated 2006 
GDP.  The increase stems from a sharp increase in both 
recurrent and capital expenditure.  Further, Sri Lanka has 
not been able to draw concessionary funds previously made 
available from the IMF (about $350 million approved in April 
2003 under a 3 year Poverty Reduction Growth Facility (PRGF) 
which ends on April 17, 2006) as it has abandoned its PRGF. 
The best use of new funds would be to retire more expensive 
 
COLOMBO 00000550  002 OF 002 
 
 
debt and fund (growth-spurring) public investment, rather 
than pay for ever-increasing subsidies and the burgeoning 
civil service.  Meanwhile, banking sources expect domestic 
interest rates to ease following the bond issue as foreign 
funding reduces government borrowing from the domestic 
markets.  Only time will tell whether the market will 
purchase enough of these bonds to make a significant 
difference in need for domestic borrowing, and if it finds 
sufficient foreign sources, whether the GSL will have the 
fiscal discipline to actually reduce its domestic borrowing. 
 
LUNSTEAD