With the rapid expansion of financialization, every nation in the world appears to be in debt. Adair Turner, former Chairman of Britain’s Financial Services Authority, in his book Between the Debt and the Devil, explained that over the decades finance got bigger relative to the real economy and its share of the US and UK economies tripled between 1950 and the 2000s. Stock market turnover increased dramatically as a percentage of GDP. On average across advanced economies private-sector debt increased from 50% of national income in 1950 to 170% in 2006. The story is no different in relation to the public debt. According to the Organization for Economic Corporation and Development (OECD) statistics, the total public debt of the USA amounts to 126% from its GDP in 2015 and the same indicator for UK, Japan and China recorded as 116%, 250% and 250% from the GDP respectively.
Sri Lanka too had become a slave of debt. Over the years debt has piled up and the amount of money paid as debt servicing had risen drastically. At one point, the entire government revenue was not sufficient to pay debt servicing payments.
The bone of contention is that investments made largely on many projects subsequently turned into white elephants, leaving a great legacy of mounting external debt. Most of the projects, which were initiated for the sake of popularity instead of focusing on economic returns, were heavily financed by the loans taken at high interest rates.
This was a precursor to the debt crises facing the country. Subsequently, Sri Lanka came to a point where the country is trapped in external debt, finding it difficult to pay-off external debt installments and interests, as many of the projects such as the Mattala International Airport (MRIA) and Hambontota port failed to provide sufficient economic return.
In addition to the loans obtained through EXIM Bank of China, the previous government raised US dollars through issuing sovereign bonds. The very first sovereign bond issue took place in 2007, and till now there has been 11 sovereign bond issues worth 9.15 billion US dollars out of which 5.5 billion of sovereign bonds were issued during the previous regime, which resulted in increasing the amount of external debt of which the majority were commercial borrowings.
According to the statistics from the Central Bank, total public debt of Sri Lanka was Rs.9387 billion, out of which Rs.5341 billion was domestic debt while there was external debt of Rs. 4045 billion by the end of 2016. Statistics clearly indicates that the portion of the external debt has risen over the years. At present, external debt accounts for little more than 43% of total debt.
Economists claim that debt, if well managed could make countries prosperous. (There is the element, so that probability of prospering through debt could even be zero). At the same time, debt could create crises which would collapse economies due to the adverse impacts affiliated to debt irrespective of debt being domestic or foreign, as Greece experienced recently. While the increase of government domestic debt could crowd out private investment, the adverse impacts of the external debt could be worse than the domestic debt.
In the event of repaying domestic debt or interest, the government could do so through printing money as the debt has to be paid in domestic currency. Of course, there is a risk of inflation when the money is printed with the objective of repaying debt or interest. However, this could be identified as a situation that is manageable, in comparison with the adverse outcomes that could arise in the event of repaying external debt. In the case of repaying external debt or interest, the government has to pay those debts in US Dollars. Sri Lanka does not print dollars, hence there has to be a method to earn US dollars. In the case of Sri Lanka, dollars are earned through exports, remittances and FDI. The sad part of the story is that the country’s exports had not increased as a percentage of the GDP during the last decade while the FDI received by the country remains very low.
That makes the Sri Lankan economy very much vulnerable to Balance of Payment (BOP) crises from time to time when the government is obliged to pay massive amounts of dollars as the debt servicing for the external debt obtained. Last year, the government obtained Extended Fund Facility from the IMF to get out of the BOP crisis occurred due to the dearth of US dollars to pay debt servicing payments. However, that is not a permanent solution to the issue, and the vicious cycle appears to continue unless the government takes long-term measures to address the issue.
One might ask that whether this threat was not there in previous decades. The truth is that Sri lanka had been dependent on external debt for so long and the threat of BOP crisis did exist. However, the danger was not severe as much as the danger that the country experiences now. The difference is appeared to be made by the rise of external non-concessional borrowings obtained during past few years.
According to the Central Bank, the share of non-concessional debt in the total foreign debt increased to 53.3 per cent by end July 2016 from 51.2 per cent at the end of 2015. In contrast, the share of concessional debt in the total foreign debt declined to 46.7 per cent by end July 2016 from 48.8 per cent at end 2015. The significant 15.1 per cent increase in non-concessional debt to Rs. 2088.3 billion was mainly due to the increase in commercial borrowings.
However, the reality that Sri Lanka can’t escape from is that the country no longer qualifies to obtain concessionary borrowings as the economy had developed into lower middle income from lower income. Hence, the government was pushed to rely on foreign commercial borrowings, and that is why Sri Lanka decided to issue International Sovereign Bonds in 2007. In that sense, the context has changed so much with regard to the external debt. To put it in simple terms, the country has to pay more dollars as interest for external debt than it paid during the 90s and early 2000s since the majority of the borrowings were concessionary.
So the task ahead of the government is neither simple nor easy. Furthermore, there is no short- term solution to the crisis either. From the Budget 2017, the government is expecting to cut down the foreign commercial borrowing to Rs.220 billion from Rs.320 billion borrowed in 2016. That is not a bad start. However, that start must continue and most importantly the debt has to be managed well.
In simple, the government will have to ensure that the return of the projects financed by the debt is sufficient. More importantly, those policy changes must be accompanied by attracting more FDI and increase exports which would help the country to distance itself from the Balance of Payment crisis.