BY EDWARD THEOPHILUS

If the debt level of Sri Lanka negatively associated with the economic growth, there is no doubt that Sri Lanka will ambush to a debt trap and the country must be able to manage the debt service (interest and instalments) including to the total government spending with a less than 6% of budget deficit.  It may be an unimaginable task at the current weak debt and budgetary management. However, Sri Lanka has a capacity to avoid the disastrous situation by wisely using a successful debt management strategy for restructuring and budgetary management concentrating the elimination of spending for unnecessary areas.

When analysing the annual budget spending, the most vicious aspect is allocating a large sum of funds for provincial administration and unproductive public enterprises management.  Should the government actually want to control this, there are strategies that could be used without involving in party politics    If entire Chinese debts converts to equities and annually buy back the equities with an organized plan or encourage Sri Lankan investors to buy back such equities, Sri Lanka can achieve an excellent economic prosperity.  Another white elephant in Sri Lanka is the management of government banks.  There are billions of risk assets in the public banks which are non-performing and the government needs to take actions to improve the net worth of public banks either restructuring them or writing off from the book. Late 1980s I conducted risk asset review of the Bank of Ceylon and found that the corrupt practices of the management have relegated the banks to obscurities.

The proceeds generate from economic projects such as the Hambantota Port, Colombo Port city, high way projects and all others, the excess after spending for project management must be used for debt retirement and buy back equities of credit projects. If this type debt management created, Sri Lanka Rupee will be daily appreciated and Sri Lanka will be the best destination for foreign investors.

The most positive aspect of the Hambantota Port development project is that the government uses a strategic plan of converting debts into equities. As a result of this strategic plan, Sri Lanka government gets a strong relief of debt service, which has gone far than the affordability of the country.  The new strategy would positively effect to save a considerable volume of funds and to reduce the stress of debt service. It would create a strong pressure to Sri Lanka’s government as well as Chinese companies to manage credit projects generating good net profit level and this situation helps the government to increase tax revenue reducing the pressure to maintain the standard budget deficit.

It is noteworthy to point out that the strategy does not widely appreciate in terms of traditional practice in Sri Lanka.  People in the traditional society used to borrow money giving lands as surety. When the borrower failed to payback collateral becomes assets of the lender. Many traditional land owners became poor or even some of them forced to be beggars on the road tendering own lands for failure to meet borrowing covenants.   The Hambantota transaction could not compare with the incidents experienced in the traditional society as the transaction already done was a widely accepted strategy in the modern world.  The consequence of the transaction is the ownership of the port will be shared to a ratio of 69:55 and 30:45.

The converting debt to equity has been a strategy that developed and widely used in many countries.  There is nothing wrong in converting debt to equity in the Hambantota port project because visibly it is the best strategy to Sri Lanka at this moment, many commercial banks in Sri Lanka use debt restructuring when the borrower fails to meet the obligations. The strategy does not restrict obtaining further financial supports for new projects, which have many opportunities to attract further Chinese supports in the future and the debt converting to equity strategy used in the Hambantota port development project would not be a barrier for borrowings.

However, it seems that a mistake has taken place when converting Chinese debt into equities in the Hambantota project.  The government of Sri Lanka did not value port shares listing on the stock exchange, the process helps to maintain the value of the port and grow local investors to buy shares.   If it happened the listed shares could be monitored and the Chinese company has to maintain the value of share with an upward trend of value otherwise China Merchant Port Holding will be incurred heavy losses and such a management style would be a challenge to the company.

Members of parliament and trade unions expressed that the country could have generated a good revenue flow from the Hambantota Port, if it was on the hands of government without leasing, but they are mere rhetoric because the public enterprise management has already proved during the past several decades that the management stewardship of the government is utter weak under the henchmen of political parties and in other public  enterprises created   a colossal loss pressuring the fiscal process in the country. Sri Lanka’s government managed many projects under the public enterprises management process but they were obviously failed and were subject to severe corruptions.  Ultimately what will happen is Sri Lanka’s fiscal system pressurize with spending and subject to accept conditions from donors and lenders that are unpopular among ordinary people like in Greece.

Sri Lanka has been desperately looking for strategic accomplishments for growing its foreign assets and reserves. During the 1960-decade Sri Lanka was given ample of feedback by the World Bank when there were emerging signs in constraints to development. The issue of devaluing exchange rate arose with the issue of the British pound.  However, there were no concrete plans without political rhetoric for the enhancement of foreign reserves of the country.  The repercussion of this weakness mainly reflected in declining the foreign and domestic value of the exchange unit. When Sri Lanka gained independence in 1948, a US $ valued to less than Rs 4.00 but it has skyrocketed to Rs 155.00 now, which is 3500 times of depreciation. The real impact of depreciating the currency value appears to be negative towards lower income earning middle class and poor people in the rural community. To avoid this negative situation, Sri Lanka can develop more port projects and export zones.

The new development projects reflect that the government has realized the issues in relation to the external economy ending the civil war in 2009 and also initiated mega economic projects with Chinese assistance. The Hambantota Port and Industrial Park development project would positively impact on foreign reserves of the country because it will generate a larger foreign exchange flow in to the country through the maritime services provided in the port.  As a result of increasing foreign reserves, the foreign value of Sri Lanka rupee will take upward trend reducing in cost of living burden.

The other macroeconomic impact in relation to port developments will be increase in employment opportunity because a broad category of jobs will be created in the project.  It will be a successful solution to absorb increasing labour force and to promote skill training process.  In other word, the project has a positive impact on the diversification of the training system in the country.  Sri Lanka needs diversification and sophistication of human resource training and development. The current practice is devoted to export human resources with a small training at a lower price.

However, the most valuable and significant impression of port development projects concern with export and services development.  Since early 1950s it can be seen that a severe competition for export of goods has been going throughout the world. In this contention, Sri Lanka faced with giant constraints mainly because of the quality of product and technological advancement were at lower level creating disadvantages to the country.  The concept of port and industrial parks development will force the export mechanism to increase the quality and sophistication.  When Sri Lanka associates with an export giant China, its competitiveness could be improved and find solutions for international trade related problems such as terms of trade, trade balance and the balance of payments etc.

Many international analysts are of opinion that Hambantota will be a centre of the traditional Chinese Silk road, which will be modified through Kra Cannel in Thailand.  The proposed Kra cannel project attracted to many countries in South East Asia and Sri Lanka would be benefited from the modern diversification of economic operations.  In this situation, why certain people in Sri Lanka oppose to such a massive development program is difficult to comprehend.

Since 1978 Sri Lanka has been engaged in reasonable level of open trade and outward looking market economic system investing in larger development projects.  As a critical observer, I notice that there is a serious weakness in policy development process in Sri Lanka, it has a weak policy monitoring and remedial management process.  Sri Lanka needs a high-powered policy monitoring and direction for remedial management.  Most of projects initiates with behemoth hopes but many objectives are subject to miscarriage in the future as there is not powerful authority to policy monitoring and remedial management.

The limited market economic system adapted in 1978 brought immense benefits to people of the country.  The weakness of the system was that there was not a competent policy authority to monitoring and remedial management resulting indiscipline’s in operations of the market economic system.  It can be seen that many people criticize the market economic system without a clear understanding of the system and lots of positive impacts incurred in the economy and the society.  The mentality of Sri Lankans aligned to certain areas.

The port development projects are highly related with a new culture for the country. The port development is also engaged with services, which would be successful only they delivered the expected efficiency and the quality.  As the concept of port development is expanding to many countries in the modern era, the quality, efficiency and competitiveness would be prime factors of the success of projects.  How can achieve such goals is a question in Sri Lanka and a high-powered policy committee can monitor the policy and make remedial management.