IMF and some private banks walking the bloody streets of Sri Lanka

There were serious allegations of private banks getting involved in the extremely dubious deal of petroleum hedging for the Ceylon Petroleum Corporation, when the Fundamental Rights petition against such hedging was taken up by the Supreme Court of Sri Lanka, chaired by the Chief Justice himself.

It was then said the hedging deal was conceived by the Central Bank Govenor, Nivad Cabraal and put through by Citi Bank, the Standard Charted Bank and the Deutsche Bank, or they stood to gain unduly by their shady hand in it.

Again the private banks and the Central Bank Governor is in the scene, this time on the IMF loan and the $ 500 million bids issue for which Cabraal is canvassing foreign investments. HSBC and Standard Charted is said to facilitate the foreign bids issue.

(01) Sri Lanka‘s Ethnic Cleansing Bonds Touted by StanChart and HSBC, IMF Silence on Vote Is “Policy”

Less than a week after five countries on the International Monetary Fund’s executive board cast rare votes of abstention and did not support the IMF’s $2.6 billion loan to Sri Lanka, due to the continued detention of 280,000 people in internment camps in the north, Inner City Press on July 30 asked the IMF to finally confirm the five abstentions or to explain why it refuses to disclose the votes of its executive board.

IMF spokesperson Caroline Atkinson replied that “it’s just a matter of our policy not to… it may even be a matter of our legal requirements… It’s a matter for executive board member to disclose their voting if they wish to. It’s not a matter for IMF staff or management, that’s always our practice.” But why?

Sir John SawersLater on July 30, Inner City Press asked the UK’s outgoing Ambassador to the UN John Sawers about the IMF loan, on which the UK abstained. Sawers too dodged the question, saying “You’ll have to ask my colleagues in Washington about the situation at the IMF board. The loan has been approved, as you say.” (Video here, from Minute 5:34.) After that, Sawers mentioned the displacement — that is, detentions — and of the “legitimate concerns of minorities, particularly Tamils.”

UK-based banks HSBC and Standard Chartered both gushed about the IMF loan, without any reference to ongoing internments. The IMF loan “is a significant positive for Sri Lanka’s external liquidity position and should further boost sentiment toward the country,” Standard Chartered’s Mumbai-based analyst Priyanka Chakravarty wrote in a research report. “It is noteworthy that the final IMF loan amount is appreciably higher than originally discussed.”

Nick Nicolaou, chief executive officer of HSBC Sri Lanka, pitched that “the IMF endorsement provides confidence to overseas investors… Sri Lanka has an excellent story to tell.” Fellow UK bank Barclays, along with HSBC and JPMorgan Chase, was involved in the Rajapakse administration’s October 2007 bond sale in the run-up to the final assault on North Sri Lanka.

Now Sri Lanka says it wants to raise $500 million more from overseas. Some say that these bloodbath bonds are now ethnic cleansing instruments. Watch this site.

By Matthew Russell Lee – United Nations, August 2

(02) Sri Lanka plans to raise $ 500 million from Overseas

Sri Lanka plans to raise $500 million from overseas investors to help rebuild the war-torn island after an International Monetary Fund loan shored up the nation’s finances.

“We will take a decision in the next few weeks,” Sri Lanka’s central bank Governor Nivard Cabraal said in an interview in Mumbai today. “We did an investor update in many parts of the world. We are here in India today to see whether there is appetite for syndicated loans, sovereign bonds.”

President Mahinda Rajapaksa is seeking funds to turn the north and east of the South Asian island into productive parts of the economy after squashing the Tamil Tiger rebels’ 26-year hold on the region. The IMF last week approved a $2.6 billion loan to help Sri Lanka rebuild and replenish its foreign- exchange reserves.

HSBC“Sri Lanka has an excellent story to tell,” Nick Nicolaou, chief executive officer of HSBC Sri Lanka, said this week. “The IMF endorsement provides confidence to overseas investors.”

If Sri Lanka sells sovereign bonds to raise funds, it will be the second time since October 2007, when investors placed orders for more than three times the amount of debt sold. HSBC, JPMorgan Chase & Co. and Barclays Capital had arranged Sri Lanka’s debut overseas bond sale.

Sri Lanka’s government in 2007 sold $500 million of bonds due in October 2012 at a yield of 8.25 percent, 397.2 basis points higher than U.S. Treasuries of similar maturity. The note yielded 9.66 percent yesterday. Benchmark five-year local- currency bonds yielded 13 percent.

“We managed to sell the bonds in 2007 when the war was still going on,” Cabraal said. “With the end of the war, the outlook to raise funds abroad is much better.”

Sri Lanka has tapped HSBC and JPMorgan to arrange meetings with investors in the U.S., India, Hong Kong and Singapore to highlight prospects in the island after the end of its civil war.

The nation is joining the Philippines and Indonesia in seeking to raise money overseas as an easing global credit crisis makes it cheaper to borrow abroad. The extra yield demanded by investors to buy emerging-market debt over U.S. Treasuries has dropped to 3.86 percentage points from as high as 8.65 percentage points on Oct. 24, according to an index compiled by JPMorgan Chase & Co.

The Philippines raised $750 million on July 13 in its second bond sale for the year, and priced the 10-year debt to yield 6.625 percent, or 3.326 percentage points more than U.S. Treasuries of similar maturity. Indonesia sold $3 billion of dollar bonds in February, pricing 10-year securities to yield 11.75 percent, or 8.759 percentage points more than U.S. debt.

In return for the IMF loan, Sri Lanka has agreed to reduce its budget deficit to 5 percent of gross domestic product by 2011 and maintain flexibility in the exchange rate in order to build foreign reserves to cover 3 1/2 months of imports and bolster the economy.

Cabraal expects the government’s move on May 1 to increase the nation-building tax to 3 percent from 1 percent will boost revenues and trim the deficit. Slower inflation also enabled the central bank to cut interest rates, halving the government’s borrowing costs to about 10 percent in the past year.

Cabraal said there is “space for interest rates to come down further,” adding that this will help the government to be on “track” to reduce the budget deficit as planned. He said the ratio of the country’s debt to GDP dropped to 85 percent last year from 102 percent in 2002.

On exchange-rate flexibility, the governor said the central bank has given a “clear signal” that the rupee will trade at a level that will benefit both importers and exporters. He said the ideal level for the currency is “what it is now” and that the central bank will prevent the rupee from excessive appreciation as foreign aid and investments flow into the nation.

Cabraal expects an average $150 million to be spent by the government, companies and foreign aid agencies each month over the next several years to rebuild roads, schools and hospitals in the country’s northern region, the last bastion of the Liberation Tigers of Tamil Eelam.

The nation’s foreign exchange reserves have risen to $2.1 billion, including about $300 million it received from the IMF this month, equivalent to two months of imports, Cabraal said. The reserves had dipped to $1.27 billion in March.

The Sri Lankan rupee has weakened 1.7 percent this year and was trading at 114.90 against the U.S. dollar today, according to Bloomberg data.

July 31 (Bloomberg) —

To contact the reporters on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net; Anusha Ondaatjie in Colombo at anushao@bloomberg.net.

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