YAHAPALANA AND THE ECONOMY Part 10
Posted on September 19th, 2018

KAMALIKA PIERIS

Yahapalana started its economic activity, by howling that the country was deeply in debt.  Central Bank of Ceylon said Sri Lanka’s total debt   at the end of September 2014, stood at around Rs. 7.369 trillion.

Between 2009 and 2014 Sri Lanka’s total government debt tripled and external debt doubled said Yahapalana in 2016. The total debt is $64.9 billion. To this must be added the loans taken   by the state-owned enterprises. We still don’t know the exact total debt, said Yahapalana in 2016. Debt is going to be huge by 2019, agreed economists.

 We are ensnared in a debt trap, screamed Yahapalana. Sri Lanka was heading for a debt crisis.  Debt payments, which included capital and interest, would reach US$2.84 billion in 2018  and USD 4.28 in 2019  2018 and 2019 will be tough years for Sri Lanka. This will decrease towards 2025.   We should make use of all our unused assets to settle the loans.

The foreign debt that was US$ 21.4 billion in 2010 doubled to US$ 43 billion in 2014, when the previous government left office, said  economist Nimal Sanderatne. The rise in foreign indebtedness was particularly sharp in the single year 2010-11, when it increased by US$ 11.3 billion. The foreign debt was as much as 57.4 percent of GDP in 2014.and debt servicing required one fifth of the country’s earnings from exports of goods and services in 2014. This is a huge burden for any country to carry, continued Sanderatne.

These debts arose because of the unproductive development projects of the Rajapaksa administration. Mahinda Rajapaksa said, in reply that that the loans were long term and carried a low interest rate of 2 per cent, the payments were arranged for, and second that the massive borrowing was for infrastructure development and not for consumption, concluded Sanderatne.

Not everybody agreed with Yahapalana‘s gloomy forecast. Chamber of Young Lankan Entrepreneurs (COYLE) pointed out in 2017 that Sri Lanka has had the lowest Debt to GDP ratio from 2010-2015.  The rank order for national debt as part of the GDP in 2016 was no 1 Japan 229.30 then  Singapore 104.70, (no 10) USA 104.17 (11) France 96.10, (14) UK 89.20, (19) European Union    85.20 (23)  and Sri Lanka 76.00 (32). The Sri Lanka debt is mainly one of domestic debt. It is not in a debt trap, said COYLE.

Dhammika Perera  said that Sri Lanka debt was relatively low. Government debt to GDP is 253% in Japan. USA debt to GDP is 105%, Sri Lanka’s debt to GDP is 80% he said. Public debt can be managed without tripping up economic growth. It’s just like you manage your home finances. You spend less interest payments than you earn every month and you ensure that you get the most out of your borrowed funds and then you have a sense of control over your money. Not all of the debt Sri Lanka has is harmful. Without debt you can’t grow. If you manage your recurrent expenditure, if you have a good business plan and you have a realistic strategy to anchor it to an adequate return on your investment, everything should be fine, Dhammika concluded.

Analysts said that Yahapalana had added to the debt. Forbes says under Yahapalana domestic debt grew by 12% and external debt by 25% without starting any new large-scale infrastructure projects. Other analysts  observed that Yahapalana borrowing had reached approximately Rs 9.387 trillion by December 2016. This had risen to approximately Rs. 10.269 trillion by April 2018.

Mahinda Rajapaksa  spoke up. Under my government, Sri Lanka Development Bonds (SLDBs) were issued only twice a year to borrow an average of around USD 350 million per year. This, too, was at the height of the biggest infrastructure building programme since independence.

However, in the year 2015, without any such projects, the Yahapalana government issued SLDBs on no less than nine occasions, followed by six in 2016 and four in 2017 and have up to now borrowed USD 7.7 billion from this source alone.”In the past three years, a further USD 9 billion has been borrowed through sovereign bonds, currency swaps, syndicated loans and the IMF Extended Fund Facility, a total of USD 16.7 billion in foreign currency borrowings alone.

During this same period they have made Rupee borrowings of around Rs.6 trillion as well. Even though a part of this massive volume of debt, like the Indian currency swaps and the shorter duration SLDBs and rupee bills and bonds have been paid off, from their first year in power this government has been borrowing and repaying, and borrowing to repay in a vicious cycle that has been rapidly gaining momentum.

The Debt to GDP ratio which my government managed to reduce from 91% in 2005 to 71% by the end of 2014, had shot up to nearly 81% by the end of 2015 according to IMF report No: 16/371.  A Peradeniya University don estimates it to be bordering on 90% by the end of 2017, continued Rajapaksa .

“The Yahapalana government’s borrowing spree was occasioned by the huge increase in expenditure in 2015 due to the special salary allowance given and the reduction in the prices of fuel and gas and certain commodities, made to win the last parliamentary election.

Even though the government claims they have been forced to borrow in order to pay back the loans taken by my government for infrastructure projects, the biggest such projects including the Norochcholai power plant, the Southern Expressway, the Hambantota harbour, the Colombo-Katunayake expressway and the Mattala airport all put together cost less than USD 3.9 billion and repaying these long term loans taken at concessionary rates of interest was never a strain on the economy. The Yahapalana government has been irresponsible and reckless in borrowing money from its inception, Rajapaksa said.

Nivard Cabraal took over. He made two consecutive statements on the subject. Sri Lanka’s debt related relevant data, as at the end of 2014, shows that Sri Lanka was never in a Debt trap., said Cabraal. Cabraal  gave the following data:

Debt to GDP ratio: 71% (down from 91% in 2005)”:* Total Debt – LKR 7,391 billion; of which, External Debt – LKR 3,113 billion: Domestic Debt – LKR 4,278 billion* External Debt to GDP: 30.0% (down from 39.0% in 2005)* Domestic Debt to GDP: 41.3% (down from 51.6% in 2005)* Average time to Maturity of Domestic Public Debt: 5 years and 8 months (up sharply from 2 years 5 months years in 2005) %.* Total Chinese Debt, mainly Project-related: USD 4.5 billion* Percentage of Chinese Debt out of Total Debt: 8%* Total International Sovereign Bonds outstanding: USD 5.5 billion* Percentage of ISBs, mainly held by US and Western Investors out of Total Debt: 10%.

Lanka’s Debt to GDP ratio was a very high 91% in 2005, when the Mahinda Rajapaksa administration took office, said Cabraal. Thereafter, through a process of sustained growth of the economy, stabilization of the rupee, increased local and foreign investment, reduction of interest rates, compression of the budget deficit, and containment of inflation, the authorities were able to reduce the Debt to GDP ratio to 71%, by the time that administration was voted out of office in early January 2015, said Nivard Cabraal in June 2018.

Thereafter, continued Cabraal, Yahapalana has increased the indebtedness of the country to unacceptable levels, with a ballooning of the Debt stock and the escalation of the Debt to GDP ratio. Central Bank Annual Report 2017 stated that, as at the end of 2017,the Government’s Debt stock has increased to Rs.10,313 billion and the Debt to GDP ratio had increased to 77.6%; up from Rs.7,391 billion and 71.3% as at end 2014, reported Cabraal.

However, the Auditor General’s Report on the Financial Statements for 2017 of the Ministry of Finance  the figure of Rs. 10,313 billion is incorrect, the actual Debt is Rs. 10,702 billion—a staggering Rs. 389 billion (about US$ 2.5 billion) higher. Such a sum is equivalent to the cumulative investment made by the Rajapaksa Government on the Colombo-Katunayake Expressway, the Norochcholai Coal Power Plant, and the Hambantota Port, continued Cabraal.

The government’s total external debt had also since increased by a massive 33%: from USD 23.7 billion at end 2014 to at least USD 35.4 billion by July 2018, of which, International Sovereign Bonds which are mainly held by US and Western investors, now account for about USD 11.6 billion continued Cabraal.

In financing the current account deficit in 2018, the government is reported to have so far raised a sizeable USD 3,838 million, of which USD 2,500 million has been from International Sovereign Bonds, USD 1,000 million has been from a China Development Bank Syndicated Loan, and further Forex loans of USD 338 million.

This debt escalation has taken place in an economy that has recorded a serious declining GDP growth rate; from a healthy average of 6.4% from 2010 to 2014 to a dismal 3.1% in 2017. The GDP growth rate for the first half of 2018 has also not shown any signs of recovery, and key sectors such as construction have experienced significant negative growth. Accordingly, the Central Bank of Sri Lanka has reduced its 2018 GDP growth projections to under 4% though most analysts now expect it to be considerably less than 3% said Cabraal.

Sri Lanka’s external finances have tumbled and the debt situation has now become seriously risky. In fact, by end July 2018, Sri Lanka’s Public Debt had zoomed to around LKR 11,971 billion: a staggering increase of LKR 4,580 billion or 59%, from the 2014 level. In addition, the estimated interest cost for 2018 has jumped to LKR 820 billion, or nearly double that of the 2014 interest cost of LKR 443 billion. The Debt to GDP ratio as at 31st July 2018 has also shot up to an alarming level of 87%, from 71% in 2014,  ” Sri Lanka has now moved into a “Highly Indebted State” category, and it is only a matter of time before that dubious status would seriously impair Sri Lanka’s ability to raise funds, emphasized Cabraal

Yahapalana brought China into their Debt story. Yahapalana blamed the debt on China.According to Treasury data   of 2016 the total debt of Sri Lanka is about $70 billion, of which over $8 billion is owned to China. Over 95 per cent of total government revenue goes for loan repayments with more than 1/3 used to service Chinese debt said, said Yahapalana

Several Western analysts have carried out a relentless media campaign in keeping with their own geopolitical agenda to suggest that China was luring Sri Lanka into a carefully engineered Debt Trap said Cabraal. .Sri Lanka’s public debt was at a value of LKR 7,391 billion as at end 2014. Of it, the loans from China amounted to approximately LKR 585 billion (USD 4.5 billion), or 8% of the total. At the same time, the Debt to GDP was at a manageable 71%, (down from 91% in 2005) and the interest cost in 2014 was LKR 443 billion or 4.2% of GDP, said Cabraal.

The debt incurred by Sri Lanka for the construction of the Hambantota Port was USD 1,322 million (or about LKR 158 billion), and such Debt was only about 2.1% of the Total Debt of LKR 7,391 billion that Sri Lanka owed as at the end of 2014. Further, the total loans from China as at the end of 2014 amounted to approximately LKR 585 billion (USD 4.5 billion), or 8% of the total. said Cabraal. Hence, by no stretch of imagination could it also be claimed that the Sri Lankan government was in a “Debt Trap” due to the Hambantota Port loan..

Yahapalana hastily alienated the Hambantota Port (which many consider as one of Sri Lanka’s most strategic assets in the Indian Ocean).  Yahapalana declared that the proceeds would be used to retire the loan but instead utilized those funds to finance the budget expenditure, and left the loan outstanding. Hence, Sri Lanka still has the same or more debt due to China in spite of the divestment of the Hambantota Port.

The Hambantota loan can be easily repaid, said COYLE. The total loan for Hambantota is USD1265.8 million, this has been repaid from 2010. The highest payments were to start in 2016 at USD 60 million.  The highest point of repayment would be in 2017 then it gradually tapers off to end in 2030. However, Yahapalana has valued Hambantota port only at USD 1,400 million and expect only USD 1120 million for 99 year lease.

Yahapalana is not deterred by any of this. Yahapalana introduced the Active Liability Management Bill to Parliament seeking authorization to borrow over Rs. 1 trillion from local and foreign sources, over and above the yearly borrowing limit set by Parliament.  This Bill was meant to bypass existing controls in respect of loans obtained from foreign and local sources.

Under this proposed law, the executive will be able to raise over Rs. One trillion in debt and make regulations about how that money will be used. Even if Parliament subsequently refuses to endorse the manner in which the money has been utilized, what was done on the authority of the Minister in the intervening period, would still be legally valid, observed Mahinda Rajapaksa.

Furthermore, so long as it can be established that they acted in good faith, no civil or criminal liability whatsoever will attach to those involved with regard to the manner in which this money is used. Given the scandals that have already taken place in the issuance of public debt under this government, the danger inherent in this proposed law is obvious. Therefore, the Active Liability Management Bill should be resolutely opposed by every citizen of Sri Lanka, concluded Rajapaksa.

“Parliamentarian Bandula Gunawardena petitioned the Supreme Court pointing out among other things that this Bill undermines the authority of Parliament over financial matters, undermines the Central Bank’s management of public debt and vests the executive arm with unrestricted power in utilizing the money borrowed.  However, the Bill was passed with amendments, in Parliament, after a row, in March, 2018.

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