{"id":108640,"date":"2020-11-13T16:13:00","date_gmt":"2020-11-13T23:13:00","guid":{"rendered":"http:\/\/www.lankaweb.com\/news\/items\/?p=108640"},"modified":"2020-11-13T16:13:00","modified_gmt":"2020-11-13T23:13:00","slug":"has-sri-lanka-been-caught-in-a-chinese-debt-trap-part-1","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-1\/","title":{"rendered":"HAS SRI LANKA BEEN CAUGHT IN A CHINESE DEBT TRAP? PART 1"},"content":{"rendered":"

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

What\nis a debt trap, is a question to ordinary people in the country, because many\npeople have no understanding of the debt trap issue, and access to related\nstatistics? People know what is a trap, and how to use a trap for various\npurposes.  A trap is used to catch\nanimals, and popularly, a trap uses in houses to catch rats and mice. Is Sri\nLanka a country like a rat looking for debt?  \nThere is no doubt that debt management in the country has been weakened\nsince the 1990s, and the demand for money on account of various development\nprojects forced the country to borrow funds from outside. <\/p>\n\n\n\n

According\nto experience in the country, traps are used to protect various agricultural\nproduces from thefts, destruction, and waste by animals and insects. It seems\nthat traps in some instances were used to punish enemies who didn\u2019t steal, but\nto get revenge, and is this usage of a trap a legally approved punishment\nsystem? No, it is, China doesn\u2019t want to treat Sri Lanka as an enemy to punish,\nas it has been maintaining a consensus with Sri Lanka that could be traced back\nto centuries, and the relationship has renewed after the visit of Mr. Xi\nJinping in 2014.<\/p>\n\n\n\n

 People who have a general understanding of\ncriminal law know that punishing people using a trap is not in terms of the\nPenal Code, and the punishment system is not associated with the court system\nof the country, or it is not a civilized method of punishing the country.  Therefore, a trap is neither a legally valid\npunishment method nor a generally implied method of punishment. The concept of\ndebt is appeared to be a warning signal to the country.<\/p>\n\n\n\n

Does\nChina want to catch Sri Lanka in a debt trap? Is the debt trap being a poetic\nterm reasonable to describe the current debt crisis in the country, as many\ncountries have relegated to the debt problems in the COVID 19 Pandemic era? Why\ndoes China want to catch Sri Lanka in a debt trap in the crisis? From the point\nof view of the west or sometimes, Indian foreign policymakers, China wants to\ntrap Sri Lanka to use for the success of its trade root concept, Silk Road\nconsidering the strategic situation. The differences and hostile situation\nbetween the western countries and India with China are not valid reasons to\ndiscredit the relationship between China and Sri Lanka.  The countries where have relationships with\nSri Lanka have not attempted to abase foreign relationships.       <\/p>\n\n\n\n

In\neconomics, the term trap was used by John Maynard Keynes in his book, titled\nGeneral Theory\u201d, and the term used to interpret the liquidity preference,\nwhich is a broader concept of the motives of demanding money. Later, the idea\nwas used to make economic policies. According to Keynes, the rate of interest\nis a defending factor in demanding money for speculation, the rate of interest\nis a leg of the demand curve for the speculative motive. The expected changes\nin the rate of interest would be a factor for demanding money for the\nspeculative motive, and the concept is used to interpret the debt market\nbehavior too.  <\/p>\n\n\n\n

Economic\ntheory assumes that whilst borrowing is depending on the rate of interest, and\nthe theory is applied to the credit market. The borrowing may lower when the\nprice of debt is higher, and the borrowing may lower when the price of debt or\nthe rate of interest is higher. This is working with the assumption that other\ninfluencing factors for borrowing are not changing.  This theoretical aspect may relevant to\ndeveloped countries, and respecting developing countries like Sri Lanka, the\ntheory is applied distinctly because the government needs to borrow money for\nvarious purposes.  <\/p>\n\n\n\n

In\nthe current dynamic environment, the total revenue of the government is not\nequal to total expenses (Y is not Equal to C), and the government has to borrow\nmoney to settle the expenditure in the fiscal process which is current,\nrecurrent, and investment purposes.   <\/p>\n\n\n\n

The\nvolume of debt in any country should be related to the rate of interest, it is\nthe theoretical assumption, the reality differs from the theory as in many\ncountries the volume debt determines considering other factors such as loan\nconditions. For example, Sri Lanka obtains loans from China as other\ninternational credit suppliers failed and reluctant to support the country. In\nthe current dynamic environment, the government cannot manage borrowing\nconsistent with the theoretical assumption as explained above. In a situation\nthat the rate of interest is higher the total debt of the government should be\nlowered, however, the idea may relevant to developed countries like America,\nJapan, or Germany, or the UK.  It is not\npractically the truth in developing countries like Sri Lanka. <\/p>\n\n\n\n

In\na totalitarian country, the leader can stop borrowing by force, however, in a\ndemocratic country, the government should respect the voice of the people and\nmay need to borrow more than the capacity to repay. It is the situation that\nappears in Sri Lanka.  The government is\ncompelled by the wishes of the people or forced by the election promises to\nborrow more money for general spending and investments. In some instances, developed\ncountries offer credit lines to developing countries with conditions to buy\ntheir productions and services. It is a complicated factor of foreign help that\nuses debts as help to own business than supporting developing countries. For\nexample, many people in Sri Lanka doubt the Kalani Valley light-rail project\nunder JICA assistance is helping Japanese firms than helping Sri Lanka.  <\/p>\n\n\n\n

As\nexplained above, the rate of interest is a determining factor for borrowing and\nKeynes assumed that the rate of interest will not be lower than 5%, and if it\nhappens so, it would become a liquidity trap, because the country can borrow\nmore and more if the suppliers of debt agree to provide credits. The idea of\nKeynes was the demand for money for speculative purposes.  The liquidity trap indirectly advises that\nnot to demand more money for speculative motive, it may be negatively affected\nthe aggregate demand in the economy that reduce employment and national\nincome.  He did not explain what would be\na negative result, later, his fellow economists such as Alvin Hanson, L.R Khan\nprecisely described the situation.<\/p>\n\n\n\n

If\na country borrows too much at a lower rate of interest it would get caught in a\nliquidity trap that is the lesson that should understand from the idea of\nKeynes or trap theory.  In Sri Lanka,\nthere is no standard of the volume of debt that could be easily regarded as a\nlimit to evaluate the country, and the borrowing more than the limit may be\ncaught in a debt trap. <\/p>\n\n\n\n

No\nstandard has been set by the monetary authority for borrowing, and the limit\nshould be published for people to understand. Many countries have determined\nthe standard borrowing limit as a percentage of the Gross Domestic Product. The\ncurrent foreign debt in Sri Lanka as a percentage of GDP is 69.64%, and if it\ntakes together domestic and foreign debt the ratio might be very higher.  <\/p>\n\n\n\n

The\nvalue of foreign debt in 2019 was US $ 55916 Million (Rs 10156 240 Million),\nand the value of GDP was Rs.14583892 Million. It is difficult to find the\nvolume of total debt borrowed from China.<\/p>\n\n\n\n

It\nis clear that debt to GDP 69.64% is at a higher level but it cannot define as\nin a trap.  My feeling is foreign debt\nshould stay less than 35% of GDP, and the current ratio of 69.64% is at a\nhigher level, and this ratio should be further reduced before more borrowing.\nIt is a gigantic policy task for the government. If the government reduces the\nforeign debt level to 35% of GDP the volume of foreign debt stays at the US $\n30 billion limits at the current level of GDP. \nThe calculation based on the current higher value of Sri Lanka rupees to\na US dollar and if the foreign value of Sri Lanka\u2019s monetary unit could be\nincreased then the debt burden of the country could be reduced.<\/p>\n","protected":false},"excerpt":{"rendered":"

BY EDWARD THEOPHILUS What is a debt trap, is a question to ordinary people in the country, because many people have no understanding of the debt trap issue, and access to related statistics? People know what is a trap, and how to use a trap for various purposes.  A trap is used to catch animals, […]<\/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-108640","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\/108640","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=108640"}],"version-history":[{"count":0,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/108640\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/media?parent=108640"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/categories?post=108640"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/tags?post=108640"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}