The Sri Lankan government appears to be using both state and private sector banks to raise funds on its behalf to fulfill funding needs, without directly accessing international capital markets.

According to a recent research report by JP Morgan, Sri Lanka’s National Savings Bank (NSB), a quasi sovereign is expected to raise issue a US $ 1 billion bond with several other private banks to follow suit, as the government is not inclined to issue a new dollar bond in 2013.

Mirror Business a few days back reported that National Development Bank (NDB), a designated development financier which also carries out operations of normal licensed commercial banks, is planning to raise US $ 250 million via a corporate bond issue shortly.

The Budget 2013 proposed a window for NDB and DFCC, the other designated development financier in the country, to raise long term foreign development finance up to US $ 250 million each, to provide long term funding for Small and Medium Enterprises (SMEs), plantations, construction industry and other manufacturing industries.

President Mahinda Rajapaksa as the country’s Finance Minister stated that the underwriting foreign exchange risk of such bond issues will be borne by the government.

JP Morgan forecasts that several of the bond issues are likely to hit the market over the next 1 to 2 months, before Sri Lanka faces the United Nations Human Rights Council in March.

According to analysts, it is unlikely that the private sector in the country will have the appetite for the large sums of funds raised from overseas sources, and predicts that majority of the money would likely to be channeled to the government mainly by way of swap arrangements.

However, some analysts are of the view that banks raising dollars through bond issues would mitigate the crowding out effect in the private sector to a certain extent if these funds were drawn by the government through investments in treasury bills and bonds with the forex risk being underwritten by the government until these funds were put in to intended use.

This is particularly important at a time when the total domestic financing of the Budget 2013 is estimated to rise 62 percent Year-on-Year to Rs.421 billion probably due to non-bank borrowings (consisting largely of Treasury bonds and bills) of Rs.289 billion (vs. an avg. of Rs.62bn over the past two years) indicating the government’s desire to rely more on domestic financing to bridge the deficit.

Responding to a question raised by Mirror Business,the IMF last week said the achievement of the projected budget deficit of 5.8 percent of GDP for 2013 would be extremely challenging amidst overly optimistic and the falling revenue targets currently at the lowest in the region at 11.5 percent of GDP.

Early part of this month, the government turned down an IMF-follow up program amounting to over US $ 1 billion as a result of IMF’s refusal to provide funds as budget support.