The interest rate of a Chinese loan to construct the Hambantota Port in southern Sri Lanka is appropriate and low, a leading financial expert said in respond to local media's questioning of the loan.
The expert said the 15-year loan agreement of Hambantota Port Phase I was signed between the China EXIM Bank and Sri Lanka in October 2007. The total loan volume was 307 million U.S. dollars with a grace period of four years.
"At first, the Sri Lankan team tried to seek loans from banks from other countries. However, those banks had no interest in providing loans to a country which was facing a civil war. Then, the Sri Lanka side turned to Chinese banks and companies," the expert said on condition of anonymity.
The Sri Lankan team did try to seek a preferential loan from China, he added, but the quota of China's preferential loans then to Sri Lanka had been used for the Norochcholai Coal Power Plant and other projects.
"Given the importance to construct the Hambantota Port Phase I, the Sri Lankan delegation decided to ask for commercial loans. In fact, to get commercial loans as large as 300 million U.S. dollars during the war was not easy," the expert said, referring to financial risks in the then civil war-stricken island nation.
The China EXIM Bank had given two options to Sri Lanka, one was the fixed rate at 6.3 percent, the other was the floating rate with the London Interbank Offered Rate (LIBOR), which was above 5 percent then with the trend to rise higher.
"The delegation thought the fixed option was more beneficial for Sri Lanka and chose the fixed rates option. One should note that the interest rate of the Treasury bill was 12-14 percent in 2007. Considering all the factors, the fixed rate at 6.3 percent was the best choice then," the expert explained. "Anyone in that situation would make such a decision, and couldn't predict the sudden international financial crisis and dramatic drop of LIBOR in 2008. It is unfair to judge the then decision based on the situation afterwards."
The China EXIM Bank, the largest loan provider to Sri Lanka, has provided over 6 billion U.S. dollars to Sri Lanka. Some 77 percent of the loans are preferential loans, of which the interest rate is 2 percent per year. The remaining fund gap has been covered by commercial loans. Both these two types of loans have contributed a lot to the development of Sri Lanka, the expert noted.
