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Not all soft loans are comfortable The idea of spurring development by borrowing may seem paradoxical, because loan repayments can be a drag on spending in the future. Yet in developing countries, where tax revenues are dearer and aid access is limited, concessional loans and debt securities are a growing part of the mix. Recently, the government insisted it will rescind an agreement for a $280 million loan to build a light rail connecting downtown Colombo to its Eastern suburbs. To walk away from a binding agreement, on an excuse that it costs too much, will have its own consequences. An LRT would have improved the lives of tens of thousands of people although a short term financial return would be difficult to generate. Costs and financial returns haven’t guided past decision-making. Consider the financial returns of the following projects which cost much more than the LRT that has been axed. Lotus Tower $104 million, Hambantota airport $210 million, the $26 million Suriyawewa cricket stadium, and the $15 million convention centre in Hambantota. There is a hierarchy in credit, and even in concessionary loans such a hierarchy exists. Our cover story discusses the concessional lending landscape. Rejecting a Japanese soft loan, with the most generous terms, to fund infrastructure with semi-soft or commercial credit sounds absurd. However, Sri Lanka seems determined to do just that.

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