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World Bank to raise Sri Lanka’s cost of borrowing

The World Bank will phase out grants and interest-free loans to Sri Lanka over the next three years, and will instead provide loans at near commercial interest rates for Colombo’s development projects.

Dr. Okonjo Iweala, the Managing Director of the World Bank made the announcement during a visit to Colombo this month, the LBO reported

Soft loans are interest free or low-interest loans, sometimes with extended grace periods in which only interest or service charges are due.

The World Bank arm that provides countries with these, as well as non-repayable grants, is the International Development Association (IDA).

The World Bank's other lending arm is the International Bank for Reconstruction and Development (IBRD), which raises most of its funds on the world's financial markets, and lends to countries at a small margin.

“Sri Lanka will continue to have access for three years,” Dr. Okonjo-Iweala told reporters, referring to the $175-200million Sri Lanka presently receives from the IDA.

Sri Lanka had sought $500 million of development assistance from the World Bank to fund its post war infrastructure programs.

While the Bank has agreed to increase its funding to Sri Lanka, the extra assistance will be met through loans from the IBRD instead.

“Now we are opening up access to more commercial, harder term IBRD funds of about, 230 to 265 million a year,” Dr. Okonjo Iweala said.

“The government has been seeking half a billion dollars a year (from World Bank). We will be approaching 405 to 465 a year (with IBRD),” she added.

According to figures released by Sri Lanka’s Central Bank earlier this month, the total assistance Sri Lanka received in the form of non repayable grants fell by almost 50% from Rs. 20.5 billion between January and September 2009 to Rs. 10.6 billion in the same period for 2010.

Sri Lanka proposed programme of infrastructure development has been funded instead by loans at commercial or near commercial rates from other sovereign lenders, primarily China, India and Japan.

Meanwhile, the Institute of Policy Studies, a Colombo based think tank warned recently against the dangers of rely excessively on foreign borrowing to finance infrastructure development.

In its Annual ‘State of the Economy Report’ for 2010, the IPS warned that excessive foreign borrowing would add to the debt burden and fuel the growth of imports, as infrastructure projects drew expensive imports of building materials and equipment.