'Govt. committed to a budget deficit of 5.8% in 2013, lowest since 1977'

This is an extract of the speech made by Deputy Minister of Finance, Dr. Sarath Amunugama on view of Budget 2013.

Over the years, Appropriation Bills have been presented to Parliament using the same language and format and hence the 2013 Appropriation Bill is not an exception to this practice and procedure.

Mr. Speaker and Members would note that the content of Clause 2(1)(b) of the Bill referred to in the Determination are identical, except for figures, with the provisions embodied in previous legislation enacted as far back as from the year 1961 and loans are presently raised, adhering to the provision of respective applicable legislation. You would further observe that the proposed amendment in the Determination with regard to raising of loans to meet cash flow requirements and the conduct of regular Treasury operations, is impractical.

Members would also note that the content of clause 7 of the Bill referred to in the Determination, had been introduced in 1975 and had remained identical to date, with the addition of words 'to meet any authorized expenditure' in 2002, consequent to a determination made by the Supreme Court in 2002. It should be noted that the Ministry of Finance and Planning had not come across the application of this clause for a long period of time, underscoring that such provisions are generally of a "Stand-by" nature and used only when grave circumstances so demand in an eventuality, to facilitate the management of public finance in the country.

You would note that section 2(1)(b) of the Appropriation Bill 2013, as in the case of previous Appropriation Acts, specifies the maximum amount of loans to be raised whether in or outside Sri Lanka, on behalf of the Government. All loans are raised in terms of the provisions of various statutes, subject to the ceilings specified in the respective laws and within the overall authorized limits specified in the Appropriation Act for the respective year. All these activities are managed by the Department of Public Debt of the Central Bank of Sri Lanka, in close consultation and coordination with the General Treasury in terms of Annual Budget operations. Since all loans are serviced in accordance with the provisions of the respective special laws, debt servicing aspects will not be carried out under the Appropriation Bill.

As far as domestic loans are concerned, under Section 89 of the Monetary Law Act No. 37 of 1947 (as amended), Central Bank of Sri Lanka provides Provisional Advances, on the basis that every advance shall be repayable within a period of not exceeding 6 months and the total of such advance outstanding at any time, shall not exceed an amount equivalent to 10 percent of the estimated Government Revenue in the Budget Estimates of the Financial Year in which they are made. Such advances are free of interest.

The Government also raises loans under the Local Treasury Bills Ordinance No. 8 of 1923(as amended) with a maturity not exceeding one year, subject to authorized outstanding limits under that Ordinance.

The Public Debt Department of the Central Bank of Sri Lanka, on behalf of the Government, conducts this operation through Primary Dealers recognized by the Central Bank. The Treasury Bills operations are conducted to meet uneven cash flow situations that arise from revenue lags and expenditure leads. Recognizing such situations, the law requires that the Central Bank itself subscribes to such issues of Treasury Bills. However, depending on Monetary Policy, considerations pertaining to domestic liquidity and money supply, the Central Bank also uses its holding of Treasury Bills to conduct monetary policy operations by trading (purchasing and repurchasing) such Bills. As the Central Bank, during the last 20 years has increasingly moved towards conducting monetary policy based on market instruments such as interest rates and exchange rates, the determination of yield rates of Treasury Bills is left to market forces, unless the Central Bank considers that an intervention is necessary, in an exceptional circumstance.

Treasury Bonds which are of medium to long term maturity, are floated by the Public Debt Department of the Central Bank, in terms of the Registered Stocks and Securities Ordinance No. 7 of 1937, at the request of the Treasury, to meet Government borrowing requirements as permitted in the relevant Appropriation Act. The maturity and interest rates of these bonds depend on the medium to long term yield curve, assessment of the availability of liquidity at different maturities and government's cash flow needs. These operations are also conducted through Primary Dealers recognized by the Central Bank. The rate of interest of Treasury Bonds is therefore market determined. Both Treasury Bills and Treasury Bonds also have secondary market transactions. As in the case of Provisional Advances, a fair amount of Treasury Bills and Treasury Bonds are floated to re-finance existing loans at maturity. Further, Rupee Loans are also issued under the said Registered Stocks and Securities Ordinance.

However, these administrative debt instruments are no longer issued as the country has shifted away from such instruments in the backdrop of financial sector reforms carried out since 1977 and only a declining stock of Rupee Securities remains under this category. Up to a 12.5 percent outstanding Treasury Bills are also permitted for foreign investments as per a Monetary Board decision to reflect global integration of the Country's financial market.

Hence, you would agree that loans raised in Sri Lanka to meet expenditure itemized in detail, in the Budget Estimates submitted to Parliament following the presentation of the Appropriation Bill and refloating of existing loans, are subject to complex operational processes, but are carried out within Parliament approved ceilings, in compliance with the applicable statutes and also well within the overall ceiling prescribed in the Appropriation Act for the relevant Financial Year.

On the other hand, Foreign Loans are raised in terms of Foreign Loans Act No. 29 of 1957 (as amended). The Government raises such loans under 4 categories:

The first category consists of loans are raised from Multilateral Development Agencies, such as the World Bank (WB) and the Asian Development Bank (ADB). The terms and conditions of these loans are common to all member countries, based on accepted categorizations. selection of various projects and programmes are determined through a consultative process between respective agencies, line ministries and the Ministry of Finance and Planning, under the guidance of the Cabinet of Ministers., such projects and programmes and the related financing arrangements are reflected in the Annual Budget Estimates submitted to Parliament.

The second category involves Government borrowings from well-established bilateral Government development agencies. The terms and conditions of these loans are determined by such bilateral government development agencies and are common to all countries eligible to borrow from such agencies.. Currently, Sri Lanka borrows from Japan International Cooperation Agency (JICA), Economic Development Cooperation Fund (EDCF) of Korea, Saudi Fund for Development (SFD), OPEC Fund for International Development (OFID), Kuwait Fund for Arab Economic Development (KFAED), Kreditanstalt for Wiederaufbau (KfW) etc.

The third category consists of borrowings from EXIM Banks of various governments i.e. India, China, Korea, USA, Malaysia, Hungary and Japan (JBIC), and reputed credit agencies which lend for project financing. The maturity structure, interest rates and other terms of such loans are negotiated through an intensive process under the guidance and approval of the Cabinet of Ministers. The term-structure of such loans also varies from project to project, depending on the socio-economic benefits and gestation periods of such projects

It should be noted that as the Sri Lankan economy has graduated to a middle income country status exceeding its per capita income well beyond US$ 1,000, the available concessional funds are fast depleting. In fact many Scandinavian and European countries no longer provide outright grants and concessional loans to Sri Lanka as the country is no long a Less Developed Economy (LDC). They lend through export import banks and their terms are largely market guided. The available funds from UN Agencies such as the World Food Program (WFP) are also no longer accessible unless in very exceptional circumstances. Concessional funding from ADB (ADF) and World Bank (IDA) are also on the decline. Middle income country status and the post conflict situation would further reduce the access to concessional funding and outright grants. Therefore, a greater flexibility in loan operation should now be recognized more than before.

Each foreign loan is examined by the Monetary Board of the Central Bank as required in terms of the Monetary Law Act on monetary implications, with special reference to debt servicing capacity and Balance of Payments. All loan agreements are approved by the Attorney General and a final Legal Opinion is issued by the Attorney General, confirming inter alia compliance with the laws of Sri Lanka, which is a pre condition to make a loan effective.

Continued tomorrow