{"id":108638,"date":"2020-11-13T16:11:08","date_gmt":"2020-11-13T23:11:08","guid":{"rendered":"http:\/\/www.lankaweb.com\/news\/items\/?p=108638"},"modified":"2020-11-13T16:11:08","modified_gmt":"2020-11-13T23:11:08","slug":"has-sri-lanka-been-caught-in-a-chinese-debt-trap-part-2","status":"publish","type":"post","link":"https:\/\/www.lankaweb.com\/news\/items\/2020\/11\/13\/has-sri-lanka-been-caught-in-a-chinese-debt-trap-part-2\/","title":{"rendered":"HAS SRI LANKA BEEN CAUGHT IN A CHINESE DEBT TRAP? PART 2"},"content":{"rendered":"

BY EDWARD THEOPHILUS<\/strong><\/em><\/span><\/h2>\n\n\n

Sri\nLanka has good strategies for debt management and the current debt statistics\ndon\u2019t indicate that Sri Lanka has caught in a Chinese debt trap, and China\nhelped Sri Lanka to expand its GDP base by initiated loan projects, and Sri\nLanka needs to expand Chinese sponsored projects in many areas, not only\nlimiting to the infrastructure development but also Chinese involvement in\nagriculture, building, and industrial areas are needed. For example, the\nproductivity and competitiveness of manufacturing industries could be massively\nimproved when Chinese investors are associated with Sri Lankans, and such a\nco-operation will cradle the dramatic increase in the volume and pace of annual\nGDP growth. If it happens the annual growth could be increased to more than 6%\nand get out of a possible debt trap because Sri Lanka can retire more debt. <\/p>\n\n\n\n

When\nconsiders the volume of current foreign debt in Sri Lanka it is not in a debt\ntrap, and further borrowing without improvement of the GDP level of the country\nwill involve in a trap.  The debt trap\nstory is a warning signal to the country. The government must concentrate to\nincrease GDP that could be done by two strategies. One is an increase in\ndomestic production, many areas of domestic production have been declined due\nto various reasons such as ignoring the productivity, competitiveness,\ninnovation, and adding new sources to domestic production.<\/p>\n\n\n\n

The\ngovernment always reiterates that it has not defaulted repayment of debt it is\nnot a valid answer to the question. If it evaluates the way of debt service it\nis clear that the debt repayment is a heavy burden to the country. The debt\nrepayment has been forced to limit many economic activities such as import\ncontrols and investment controls. Farmers in the country have a grave problem\nwith water and no successful projects are initiated to solve the basic\nproblem.         <\/p>\n\n\n\n

The\nrate of interest is a major macroeconomic factor that influences the economy,\nand Keynes believed that the interest rate will not reduce less than 5% and if\nit reduces less than 5%, he stated that a country would be in a liquidity trap.\nIn developed countries, the rate of interest has declined to less than 5%, and\nmany people caught in the debt trap as they have borrowed for housing, personal\nloans, credit card debt, and many others. \nThe lower growth of economies in developed countries in the COVID 19\nenvironment, the rate of interest has declined to less than 5% and the\nsituation doesn\u2019t look that individuals and firms motivate to borrow more as\nthe revenue of firms, as well as individual, has dramatically declined and in\nthis environment, it shows that liquidity trap theory is not working as it\nstated by Keynes.    <\/p>\n\n\n\n

The\nmeaning of the debt trap to any country is that it borrows more than the\naffordable limit it will be caught in a debt trap, and when a country is in a\ndebt trap it is difficult to get out of the trap. For example, Sri Lanka has\nborrowed more than the limit, and many economists believe that it is in a trap.\nAlthough this is the simple meaning of the debt trap it should consider many\nfactors that are associated with the reasons for borrowing.  In the case of Sri Lanka, during the past 30\nyears changes in the consumption pattern of people and the dynamism of the\neconomy, political environment, and international relations have forced Sri\nLanka to borrow more and the revenue sources of the country have not been\nchanged consistently to changes (increase) in demand for borrowing.  In this environment what can Sri Lanka do to\navoid a debt trap is an issue that needs to debate by economics and come to an\nagreement.<\/p>\n\n\n\n

How\nto determine the debt trap? It is not an easy task.  Internationally, there is an acceptance that\nthe borrowing of a country should be consistent with the volume of Gross\nNational Product.  It is difficult to\nexactly say the rate of debt of a country compared to the Gross National\nProducts.  This may change in developed\ncountries as well as in developing countries. Some developed countries allowed\nto increase the debt level by more than 100% of GDP. Many economists believe\nthat if there is no problem with debt service any country can increase the debt\nlevel.  For example, Japan\u2019s debts\nincreased to more than 100% of GDP because the country had a trust that could\nadjust quickly and the country had a highly positive vision that the level of\nGDP will increase and debt could be managed without caught in a trap.  This is the difference between Sri Lanka and\nJapan, although Japan has the confidence to increase the debt Sri Lanka has no\nsuch certitude that the country\u2019s GDP will increase to settle the debt.<\/p>\n\n\n\n

The\nvolume of debt to China could assume as the US $ 6.0 billion it could be\nsettled within the period of loans if the projects that invested borrowed funds\nwork well.  If it considers in that line\nSri Lanka has not been caught in the Chinese debt trap, but the aggregate debt\nis higher in Sri Lanka than its affordability. \nIt looks like the prime objective of economic management is to manage\ndebt service than other economic activities.      <\/p>\n\n\n\n

In\nthe process of debt management, Sri Lanka could use a variety of strategies,\nthe main strategy is to convert the projects to private hands than keeping them\nin government ownership.  Although\nstrategically it is possible to show less government debt level the reality\nshould be lower debts to outside and the best strategy should be a genuine\nattempt to manage the debt level to less than 50% of GDP and this can be done\nonly by increasing the GDP growth more than 7% that is the difficult task the\ngovernment will ever see.<\/p>\n\n\n\n

The\ndebt tap story was a statement of Mr.Mike Pompeo that used to get publicity for\nhis travel, however, it cannot be ignored by Sri Lanka\u2019s government. There is\nan obvious competition between China and the USA about various matters and the\nspeech of Mr.Pompeo doesn\u2019t warrant that the USA will help to settle Sri\nLanka\u2019s debt to China.<\/p>\n\n\n\n

The\nownership of projects that have been financed by China could be given to China\nsubject to the repurchase of projects by the government and reduce Chinese debt\nand make efficiency in projects.  If the\nprojects generate a loss in which the owner will be China and it would manage\nat a profitable level to receive a dividend and considering positive debt\nmanagement strategies is the best option for Sri Lanka.     <\/p>\n","protected":false},"excerpt":{"rendered":"

BY EDWARD THEOPHILUS Sri Lanka has good strategies for debt management and the current debt statistics don\u2019t indicate that Sri Lanka has caught in a Chinese debt trap, and China helped Sri Lanka to expand its GDP base by initiated loan projects, and Sri Lanka needs to expand Chinese sponsored projects in many areas, not […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"footnotes":""},"categories":[124],"tags":[],"class_list":["post-108638","post","type-post","status-publish","format-standard","hentry","category-edward-theophilus"],"_links":{"self":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/108638","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/comments?post=108638"}],"version-history":[{"count":0,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/108638\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/media?parent=108638"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/categories?post=108638"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/tags?post=108638"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}