Home / Opinion and Issues/ Budget is not the reason for debt burden

Budget is not the reason for debt burden


Comments / {{hitsCtrl.values.hits}} Views / Tuesday, 16 July 2019 00:00

Facebook

 

Sri Lanka issued yet another sovereign bond in June. It was not long ago that many were complaining about Sri Lanka’s debt burden. Irrespective of that, borrowings continue. Concrete, material changes have not taken place to reduce the debt burden.

Concern is foreign borrowings, not rupee debt

In the writer’s view, it is the foreign borrowings that is a concern rather than the domestic borrowings. The rupee debt is within the control of the Central Bank. However the foreign borrowings are not within the control of the Central Bank. Therefore, risks such as severe depreciation of the rupee, need for adhoc import restrictions and the possibility of debt default exists. Hence, the strict monitoring should be on foreign debt as a percentage of GDP and not the total public debt as a percentage of GDP. 

Foreign debt, the reason for debt burden

Since independence the highest level of foreign debt as a percentage of GDP was recorded in 1989 at 62%. The total public debt as percentage of GDP was also the highest at 109% that year. Since then the foreign debt as a percentage of GDP decreased to a lowest level of 30% by 2014. The total public debt as percentage of GDP also decreased to the lowest level of 71% the same year. Since then, the foreign debt has risen again to 41% by 2018 while total public debt has also increased to 83% of GDP.

What should be noted is, domestic debt as a percentage of GDP has remained relative stable around 40-45% throughout. Therefore as we argued earlier, it is not the domestic debt that is of concern. 

Wrong diagnosis

The general thinking is the prime cause for the debt burden is the high budget deficit (i.e. Government expenditure being much higher than Government revenue). As a result, a fiscal consolidation exercise is being done, involving increasing tax rates and curtailing Government expenditure (mostly a reduction in investments). 

As we have written in this column, those measures have failed to reduce the budget deficit as the slowdown in economic growth has hampered Government revenue. As we have also argued before, the bigger concern for Sri Lanka is not the Government budget deficit, but the external current account deficit.

Prime cause for foreign debt

What’s the reason for the sharp rise in foreign borrowings, or what triggers the need to borrow in foreign currency? 

The answer lies in the fact that Sri Lanka imports a lot more than the entirety of all foreign currency earnings. The total of merchandise exports (apparel, tea, rubber, etc.), worker remittances and tourism earnings was still lower than the import bill by $ 2.8 billion in 2018. To finance the excess imports, Sri Lanka has to resort to foreign borrowings. Hence the solution lies in coming up with measures to reduce the external current account deficit or convert it to a surplus.

FDI is a temporary fix

While some argue that higher FDIs would reduce the need for foreign borrowings, it is not a sustainable solution. In other words, such FDIs should result in an improvement in the external current account in the long term (i.e. either reduce imports and/or increase foreign earnings in the future). What that means is, those FDIs should be to industries which would either boost foreign earnings or substitute imports in the future. That has not taken place.

Root cause is not addressed

The last time Sri Lanka recorded a surplus in the external current account was way back in 1977. Since then, Sri Lanka has always recorded a deficit in external current account. Not only that, while the need is to reduce the external current account deficit, Sri Lanka has not witnessed a sustained reduction in external current account deficit for a period of more than five years since 1977. 

Are we using the sovereign bond funds wisely?

Sri Lanka issued a 10-year sovereign bond for the first time in 2010 for $ 1 billion. The external current account deficit that year was $ 1.07 billion. Then in 2015 Sri Lanka raised over $ 2 billion of 10 year sovereign bonds. The external current account deficit that year had deteriorated to $ 1.9 billion. In 2019 we have already raised $ 2.9 billion of 10 year sovereign bonds. The external current account deficit has deteriorated further to $ 2.8 billion in 2018. 

Clearly the real problem is getting aggravated as the foreign debt burden keeps increasing. We have misdiagnosed the problem and continue to prescribe the wrong medication. 



(The writers could be contacted via articles@w-n-y.org.)


Share This Article

Facebook Twitter


DISCLAIMER:

1. All comments will be moderated by the Daily FT Web Editor.

2. Comments that are abusive, obscene, incendiary, defamatory or irrelevant will not be published.

3. We may remove hyperlinks within comments.

4. Kindly use a genuine email ID and provide your name.

5. Spamming the comments section under different user names may result in being blacklisted.

COMMENTS

Today's Columnists

Religion is a problem in Sri Lanka; can it be a solution?

Saturday, 17 August 2019

Generally, it is expected that religion should be a solution to a problem. Ironically in Sri Lanka religion is the problem. Therefore, what would be the solution? When religion becomes a problem of a country....


Orthodoxy and change: A perennial Muslim issue

Saturday, 17 August 2019

Whether Muslims live as minorities in non-Muslim countries or as majorities in a total of fifty seven countries, the clash of orthodoxy with modern challenges is a perennial issue that bedevils progress on several fronts in these communities.


Making the MCC Compact work for Sri Lanka

Friday, 16 August 2019

It is a sign of these political times that even an apolitical issue like a foreign aid program becomes a hot topic in Sri Lanka. In April 2019, the Board of Directors of the Millennium Challenge Corporation (MCC) approved a compact program for Sri La


Sri Lanka needs a president hungry for success, not power

Friday, 16 August 2019

The late John F. Kennedy described politics as a “noble adventure, an adventure in which one joins hands with the masses for the service of man”. Not that the Kennedys didn’t play “politricks” in their heyday. But playing “politricks” w


Columnists More

Special Report

SPECIAL REPORT MORE