By Dr. WAQUAR ANWAR
Sri Lanka has ultimately announced to suspend repayment of all foreign debts, including government borrowings and bonds based on sovereign guarantees. The governor of Central Bank of Sri Lanka, P. Nandalal Weerasinghe, said that the nation needed to focus on essential imports and would not be worried about servicing of debts. This unilateral announcement on non-payments of due and accrued payments against foreign debts amounts to declaring itself bankrupt.
The country has foreign debt payments of around $4 billion due this year, including a $1 billion international sovereign bond maturing in July. A coupon payment of $78 million is due across two of its bonds maturing in 2023 and 2028. It is estimated that Sri Lanka needs $7 billion to service its debts. However, its foreign reserves have come down to lower than $2 billion.
The governor has said that the suspension of debt-payment would be till the country is able enter into an agreement with its creditors and a loan support programme with International Monetary Fund (IMF) is finalised. This is not the first time that Sri Lanka would enter into a loan arrangement with IMF. It did so 16 times earlier too since 1950 including recent bail-outs in 2009 and 2016.
Sri Lanka is in deep economic crisis. It is not in a position to import essential consumption goods owing to serious Balance of Payment problem and fast depleting foreign reserves. Its major source of revenue is tourism but the recent Russian invasion of Ukraine has badly affected this industry because it had been attracting tourists from these two countries in good numbers. Further, Russia had been a major importer of tea from Sri Lanka.
Export of tea has been a major source of foreign exchange revenue for Sri Lanka. Its output has suffered heavily because of ill-advised moves of the present political administration. President Gotabaya Rajapaksa decided to ban import of all chemical fertilisers in 2021 so that the nation become a 100% organic farming nation overnight. The cause was noble but changes do not occur in sudden manners.
The decision hit the country’s farm and agriculture sectors adversely, leading to a drop in the critical crops of rice and tea. The total ban of chemical fertilizers and pesticides produced a severe economic crisis. The government cancelled some measures, but importing urea remains banned.
National planning cannot be based on impulsive diktat of rulers. There is no doubt that organic farming is desirable but any changeover from something in practice needs careful planning consultation with experts. Sri Lanka’s present political administration appears to be hasty and populist in approach.
Gotabaya Rajapaksa, in 2019 elections, promised lower tax rates. He went ahead to fulfil the promise after winning the elections, without consideration of implications. The idea was that the loss of revenue because of providing tax benefits will stimulate economy so it will be offset by higher economic activities. The assumption was too simplistic and romantic to be correct. The extent of tax sops and concessions was unprecedented.
The threshold limit of tax was increased more than five times, resulting in 33.5% decrease in taxpayers. VAT was reduced to 8% and some other taxes were totally abolished. The president considered these to be investments for future growth and wanted to continue with this plan at least for five more years. The move back-fired and government revenues were hit hard. Populist election promises without proper homework and study do more harm than provide any benefit. At this stage the government, in order to meet government expenses, did the blunder of printing money in great numbers, against all national and international advice.
Government expenses need to be controlled. It should not, at least, increase based on loans from foreign countries. Any project undertaken, particularly those with financial assistance from foreign sources, should be done only after serious cost-benefit analysis. This simple principle of economy and finance has been ignored in Sri Lanka.
The case of a port and an airport built with Chinese loans and financial accommodation is its example. Eighteen kilometres from Hambantota Port in Sri Lanka lies Mattala Rajapaksa International Airport. These both were built with Chinese partnership. Mattala Rajapaksa International Airport, reportedly a gigantic construction from international standards, has the unique distinction of being the least used airport in the world. It was built when Mahinda Rajapaksa, brother of Gotabaya Rajapaksa, was president of the country. Both these ports and airports were built with loans from Chinese EXIM Bank. Sri Lanka was not able to pay back the loan taken for building Hambantota Port and it had no other choice than to hand it over to China, the lender, along with 15,000 acres of land around it for 99 years lease. These are glaring examples of financial mismanagements.
However, it would be a simplistic analysis to blame China for the ills of Sri Lanka because external debts owed to China is only about 10% of total such debts. Around 10% are owed by Japan and India’s share is around 5%. More than 20% debts are owed by international development banks, while International Capital Market provided about 50% of debts. The International Capital Market provides loans based on sovereign guarantees by governments and are heavily affected by the reports of rating agencies.
The rating agencies have been downgrading Sri Lanka. They have been calling foul of the state of Sri Lankan economy. However, strangely it may be noted that no such red alert was raised by IMF although this country has been under their radar since long.
IMPACT ON SOCIETY
The impact of this crisis on the lives of the nation has many manifestations. People have to live with 13 hours daily power cuts and soaring inflation. The government is seeking to implement peace-time rationing of essential commodities, including food and fuel.
It is true that Sri Lanka faced many serious unique problems. It faced 26-year long civil war up to 2009. Further, the Easter bomb blasts of April 2019 in churches in Colombo which resulted in 253 casualties, resulted in sharp drop in foreign exchange reserves. But nothing can justify the loan spree of the political establishment without proper study of viability and feasibility, including repayment possibilities.
Nearly 1000 bakeries shut down their shutters because of paucity of cooking gas. Long queues in front of petrol filling stations have become order of the day. Several schools in Sri Lanka announced postponement of term/mid-year examinations owing to shortages of paper because foreign exchange required for imports was not available. All scheduled surgeries in many hospitals have been stopped for want of medicines. Sri Lankan Embassy in Norway, High Commission in Nigeria, Consulates in Germany, Australia and Cyprus became disfunction for lack of funds for payment of salaries and meeting expenses.
HARD STEPS REQUIRED
The short-term solution of a fresh loan from IMF is not the panacea. This medication has side effects which would ultimately worsen the condition, despite short term respite. The problem created by foreign debts cannot be solved by fresh dose of debts. The conditioning of IMF, worldwide, has not been succour to any nation. This is a vicious circle. The nation needs to take hard steps like increasing domestic tax revenue and controlling government expenses and taking back all extravagant projects, which have been fancies of rulers.
The problem is that the present political establishment cannot take these steps without taking its natives in confidence. They have lost credibility. They need to admit their mistakes, rather blunders, before the public and go ahead with national consensus.
Sri Lanka is a case of economy based on heavy loans for fancy projects without proper cost and benefit analysis. A nation should plan its developments based on its internal resources and should grow gradually. The impulse to increase the pace of accelerated development on the strength of borrowed fund has to be shelved for good. Particularly easy money without any proper project planning made available on sovereign guarantee by Internal Capital Markets should be a taboo. They are sharks in the guise of whales. IMF too is dangerous. The level of debt, presently linked to GDP, should be linked to internal revenues generated from taxes.
It is reported that the internal revenue to debt ratio of many states in India is at dangerous level like that in Sri Lanka. Even if such reports are emanating from political circle and media which are considered critical to current ruling establishment, these should not be brushed aside. Take note if there is worth in reports. Economic planning should be above political gimmicks.