Sri Lanka has not tapped international debt markets before choosing instead to raise dollar loans through local banks and from friendly governments.
Sri Lanka has traditionally run budget deficits of over 8 percent of GDP financed mainly through borrow in the local market and sometimes by printing money.
Last year, the Central Bank printed Rs. 65 billion by buying government bills to finance a rising deficit because of unbudgeted subsidy spending.
Government didn't have money to invest in large infrastructure projects like the Colombo Katunayake highway project despite high fiscal deficits.
Much of the deficit has been eaten up by current expenditure.
Current account deficits: that is the amount borrowed for recurrent expenditure like paying salaries, pensions and interest has averaged 4 percent during the last five years.
Economists say deficits are nothing to worry about as long as they are invested in infrastructure that generates growth in the future.
But when governments borrow money to finance their day to day spending it doesn't contribute to future growth.
Negative Current accounts indicate the budget deficit is financing recurrent spending.
Next years planed borrowing of up to US$ 500 million will be for identified big infrastructure projects like highways and ports according to the government source.
The benefit according to government is that big infrastructure that gets normally neglected because of a lack of money can go ahead without crowding out the private sector.
However, government is unlikely to present a budget for next year, depending on a vote on account instead because of the presidential elections.
However, the need to tap international market for debt will arise sooner than later for even a new government afterwards because of Sri Lanka graduating to the levels of a medium income country.
Ratings the country plans to obtain from all three international rating agencies Moody's S&P and Fitch is the first step to towards tapping the international bond market.
Analysts expect Sri Lanka to get a double B minus (BB-) rating which is below investment grade.
However, they say countries with below investment grade ratings frequently tap the international market and Sri Lanka should also be able to do so.
Sri Lanka Telecom is the only corporate to tap the international debt market so far when it borrowed a US$ 100 million for five years at 300 basis points above LIBOR. Government is also likely to seek a similar tenure on its dollar debt.
Earlier the Treasury Secretary P. B. Jayasundera said government plans to retire some of the existing dollar debt with cheaper ones raised in the international market.
He did not say when it would be done.
Meanwhile, a team from Fitch Ratings was in the island this week to work on the sovereign credit rating.
Fitch officials say countries with prudent policies attract higher ratings.
"Prudent policies mean public finances are well controlled," says James McCormack, Head of Asia Sovereign Ratings, Fitch.
"So we don't see high deficits or high debt levels in countries with prudent policies. Prudent macro economic polices typically lead to high economic growth. Private sector can function better when public sector deficits were low and there is a greater access to the banking system."
"It contributes to private sector growth. The same thing could be said to prudent monetary and exchange policy -it contributes to private sector economy growth which again feeds back in the public finance which is very good for credit rating. So prudent policies are typically associated with higher rating countries not only in Asia but around the world," he says.
Despite having large foreign reserves, India has been unable to improve its rating because of weak fiscal policies.
"Indian government has chronic general government deficit, which is about nine percent of the GDP during the last decade. Which translates into a very high public debt to GDP ratio? Even if the Indian economy is growing at a rate the debt is not coming down," say Paul Rawkins, Senior Director, Sovereigns Fitch.
"The economy may be growing at about 12 percent. But even if the economy is growing fast the public sector is still not improving."
-LBR Newsdesk: LBOEmail@vanguardlk.com