ECONOMYNEXT – Loans extended by the Exim Bank of China to several state-owned enterprises and government-guaranteed loans taken out by Ceylon Petroleum Corporation will be taken by the central government, President Ranil Wickremesinghe said.
The Exim Bank of China has financed a coal-fired power plant for the state-owned Ceylon Petroleum Corporation, which has been determined by the Auditor General to be perhaps the best investment Sri Lanka has made since the hydropower plants of the multi-purpose project of Mahaweli.
Sri Lanka Airport has also secured a loan to develop Mattala Airport, considered a “white elephant”.
The Port Authority of Sri Lanka has received a loan from the Exim Bank of China for the Port of Hambantota.
China paid US$1.1 billion in cash for a stake in the port.
However, Sri Lanka is not used to settling Chinese debt. Instead, “more expensive” loans from other parties were settled.
The Ceylon Petroleum Corporation has about $2.0 billion in loans taken out with state banks after the central bank printed money to suppress rates and target an output gap, triggering currency shortages.
Sri Lankan analysts called them Nick Leeson loans.
Singaporean Prime Minister Lee Kuan Yew referred to this debt contracted by soft-pegged countries as “hedging loans” a day before the announcement of the creation of a currency board on August 26, 1966 in Parliament by the Minister of Foreign Affairs. Finance at the time, Lim Kim San.
“Now we are going to run a monetary system, which means that as soon as we earn less, we spend less,” Prime Minister Lee told a trade union on the evening of August 25. “And I say we do or we die because this is a society with an open, exposed market.
“If you start playing around with money and you start printing money, and then you don’t really have any money to spend and you start borrowing to cover it, you’ll end up in scarcity and bitterness.
After committing to the stimulus (targeting the output gap), policymakers are then forced to put the pauses because the inevitable consequences ensue.
The IMF taught the central bank of Sri Lanka to calculate the output gap. Sri Lanka is now in “Okay, stop it; Pause; pull the money back”, a mode that the same economists of the “lost generation” call “stabilization”.
Sri Lanka defaulted after borrowing billions of dollars from both China and sovereign bondholders as hedging loans under flexible inflation/targeting differential production triggered currency shortages.
Under an IMF program, a new monetary law allowing for flexible inflation targeting or discretionary policy to “play with the currency” as has happened over the past 7 years, triggering three currency crises in quick succession, must be legalized. (Colombo/November 14, 2022)