The debt knell tolls

Over the weekend it came to light that Sri Lanka’s Light Rail Transit (LRT) project was being placed on the back burner after the Japanese government - who funded the project - halted funding, having raised concerns regarding Sri Lanka’s ability to repay the loan. 

The Government of Japan had been alarmed by a combination of factors, specifically, Sri Lanka’s request for a debt moratorium from Japan, combined with Sri Lanka pushing ahead with the construction of new power plants. This, along with the President’s assertion earlier in the year that the project would not be able to continue for the next five years, had given Japan enough pause to halt financing altogether.

For the Japanese government, much of their consternation arises from perceived policy inconsistencies and a lack of clarity on the part of the Sri Lankan Government with regard to their ever-growing national debt. 

This, while not a new nor novel concern, is nevertheless a red-hot indicator as to the direction in which the Sri Lankan economy is heading - lest it correct course expeditiously. For many years now, Sri Lanka’s investment framework from a policy standpoint has been extremely flawed. Successive Governments have been involved in a cycle of taking up ill-thought out proposals that have a very long return on investment, rushing through tender procedures, and axing the previous regime’s plans once coming in to power, to name but a few in a long list of grievances.

Sri Lanka’s steady drop in growth numbers and repeated balance of payments crisis over the years only serves to solidify the view that the country’s debt dynamics are simply not working. And to paraphrase Einstein, the clearest sign of insanity is doing the same thing repeatedly expecting different results.

For Sri Lanka, the plan to leverage debt in the search for economic growth has just about run its course. The country’s debt-to-GDP ratio has rocketed from roughly 55% in 2006 to over 90% in 2020.

It’s clear that despite such high spending, there just isn’t enough economic growth to show for it. And what’s even clearer is that, as it stands, there is no longer enough room for manoeuvring. This year alone debt repayments total Rs. 4.8 billion, of which Rs 3.2 billion is still outstanding.

For the Sri Lankan Government and President Rajapaksa, this should serve as a wakeup call, but also an opportunity to avoid the same pitfalls of previous regimes - where long-term objectives are waylaid by irredeemable mistakes in the short-run. The first step of subverting this trend is to, rather than push through projects haphazardly sans parliamentary oversight, wait till Parliament is in session and instead use this critical time period at the start of their term to clearly identify, debate and demarcate a core set of projects. Secondly, match the said projects to President Rajapaksa’s election manifesto. And finally, ensure that whatever projects are approved and financed, they fit in with Sri Lanka’s long-term economic reforms.

This means that, while ensuring cheap electricity generation is essential to development, it should not come at the expense of long-term sustainability objectives. Nor can the country continue to indiscriminately increase its national debt on economic projects that lack a clear plan of economic return. Sri Lanka, quite simply, cannot afford any more slip-ups.