Further to our analysis last week on Sri Lanka’s trade, debt and currency quandary, see this report by LBO:
The Sri Lankan Highways Ministry is borrowing $500 from local banks, ostensibly to finance road reconstruction.
The loan is part of Colombo’s growing reliance on loans from domestic banks to meet shortfalls in its budget, as government spending continues to outstrip its revenue. (see p9 here).
The state has been increasing its control over the banking sector by using publicly owned pension and insurance pension funds to buy banking stocks - nationalisation by stealth.
Unsurprisingly, domestic bank lending to the Sri Lankan government grew by almost 14 per cent in the first six months of this year.
The increase in lending to the government coupled with increasing state control over the banks means the banking sector is unable to stop accumulating bad debts – cheap loans to state agencies that are unlikely to be repaid.
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