No valid reason to reject MCC grant - Advocata | Sunday Observer

No valid reason to reject MCC grant - Advocata

1 September, 2019

Sri Lanka is at risk of losing a US $480 million Millennium Challenge Corporation (MCC) grant due to a campaign of misinformation and political differences among the ruling ‘coalition’. The MCC grant represents the largest grant from a single source Sri Lanka has ever received and presents a valuable opportunity to fix some of the country’s constraints to economic growth, Advocata, a Colombo-based think tank said in a press release.

The release said:

“Despite the fact that this grant is being offered as a response to a proposal submitted by the Sri Lankan government, political dysfunction has resulted in the government failing to sign the final agreement. Sri Lanka is now at risk of losing the grant, if it does not receive Cabinet approval and fails to sign the agreement prior to the MCC Board meeting on September 18.

“Sri Lanka has been awarded a US $480 million 5-year Compact in response to a proposal submitted by the government in 2017. Selected countries then go through a constraints analysis study to identify the bottlenecks for economic growth. Sri Lanka’s study was led by the Sri Lankan Government with the assistance of Harvard University’s Centre for International Development and the MCC.

“Much of Sri Lanka’s development over the last decade has been driven by high levels of government spending.

However, with weak tax revenues (11.8% of GDP in 2018 ), high budget deficits (5.3% of GDP in 2018 ) and enormous debt (total government debt was 82.8% of GDP in 2018 ), it has become unsustainable to continue relying on government spending to drive growth.

Sri Lanka’s high concentration of borrowing from a handful of financing sources, has also made it inherently vulnerable to external shocks and poor national macroeconomic management. In 2018, approximately half of Sri Lanka’s borrowing was from private capital markets, with nearly a third of total borrowing in 2018 coming from China. This has severely destabilising implications for both Sri Lanka’s economic growth and its foreign policy position.

“The MCC Compact could go a long way in addressing both of these issues. Implementation of the projects would diversify sources of development finance while creating essential infrastructure to improve land administration and internal mobility options. Uneven development and chaotic land administration have become major obstacles to Sri Lanka’s sustenance of economic growth.

“In the final cost-benefit analysis, and based on the publicly available information, the compact seems to present an attractive development opportunity. It is important to note that the MCC compact is a grant, not a loan and therefore is not required to be repaid. In the event that Government fails to sign the agreement in time and seeks to undertake the projects on its own accord, it would need to borrow the funds from another external source.

“Earlier this year the government issued international bonds of US$1bn at an annual interest rate of 6.85%. It would be safe to assume that future borrowings are likely to reflect similar conditions. This means that the government would not just be paying back the loan amount, but also a significant amount of interest on top of it - adding to Sri Lanka’s already debilitating debt status.

“Those who wish to argue against the compact need to refer to the relevant documents and provide evidence if their case is to be taken seriously. At this stage, if the government chooses not to sign the agreement prior to September 18, it runs the risk of choosing to increase the national debt burden as well as delay essential development. Such a choice should be based on sound reasoning and evidence,” the release further said.