Crouching crisis, hidden debt By Sanja de Silva Jayatilleka

What’s to stop those with the opportunity, from continuing to defraud on this massive scale, and get clean away? 

“…the loan taken by the Government to construct the Hambantota Port is not appearing in the financial statements of the Government or Port Authority.” 

– (Auditor General’s Special Audit Report on Financial Management and Public Debt Control in Sri Lanka 2018-2022) –

There was an IMF team in town. According to the Sunday papers, the Government, and some Opposition MPs had thought, too optimistically, that the administration of President Ranil Wickremesinghe was on track to conclude a staff level agreement with the visiting team. The IMF instead announced that “Sri Lanka’s public debt is unsustainable” and they would need assurances from Sri Lanka’s creditors that “debt sustainability would be restored”, before an agreement could be reached.

This has not proved easy for Sri Lanka to do. And yet, some African countries have been lucky with their outstanding debt as Windobi reports: “China will cancel 23 loans for 17 African countries, Chinese Foreign Minister Wang Yi has announced… according to a statement at the Forum on China-Africa Cooperation.” [China forgives debt for 17 African countries amid accusations of diplomacy in the debt trap - Windobi, August 22, 2022 by Editorial staff]

Sri Lanka is yet to negotiate an outcome that is even halfway as pleasant, and are probably unlikely to do so anytime soon. 

What exactly is the debt we are talking about? Do we have a number?

In 2016, Reuters reported that Prime Minister Ranil Wickremesinghe addressing journalists at a hotel in Beijing, China on 9 April, had said, “Sri Lanka’s previous government hid debts of at least 1.36 trillion Sri Lankan rupees on the books of some state and semi-government institutions, aggravating the debt crisis.”

[https://thewire.in/south-asia/sri-lankan-pm-wickremesinghe-blames-hidden-debt-for-financial-crisis]

Reuters continued: “The Prime Minister told Parliament: “We still don’t know the exact total debt number.” He said it would only become clear after a three-member committee reported following an investigation. It was not immediately clear when that would be.” 

In September 2016, Forbes had a story with the headline “Sri Lanka’s Debt Crisis Is So Bad the Government Doesn’t Even Know How Much Money It Owes”. It goes on to reveal that “it’s now becoming evident that the previous government also utilized state-owned enterprises to take out additional loans on its behalf. While the full extent of this extracurricular lending seems unknown, current estimates peg it at a minimum of $ 9.5 billion — which is all off the books of the finance ministry.”

Scammed by the Ministry of Finance?

We the citizens seemed to have been had, apparently by the Ministry of Finance. Whatever Prime Minister Wickremesinghe’s investigation discovered, it had little or no impact on the problem itself, as the subsequent Audit reports confirm. 

Two years after the promised investigation, on 8 February in 2018, the Daily FT had a story that was accessed online by nearly 15 thousand people with the headline “Auditor General drops bombshell”, under the byline of Chathuri Dissanayake.

It quoted then Auditor General as saying, “Government institutions have engaged in continuous “window dressing” of financial records to underreport national debt and bypass borrowing limits imposed by debt management regulations, Auditor General Gamini Wijesinghe revealed yesterday.” It adds, “Although there is a line in the balance sheet called ‘Investment on Borrowings’ they have already accepted in writing that there is no such account. It is a dummy account,” he said. (Auditor General drops bombshell | Daily FT)

Despite all these reports in the public domain, the practice seems to have continued regardless. Parliament, which has the Constitutional responsibility for financial oversight, was already aware of this unethical, unwise, fraudulent conduct, but seems to have been helpless to prevent its continued practice, right up to this year. 

Incredibly, in May this year, 2022, Prime Minister Ranil Wickremesinghe, PM again for the 6th time to fill a vacancy left by the departing Mahinda Rajapaksa, repeated the same complaint to the media. As reported in Silk Road Briefings with the title “Sri Lanka’s dire economic situation and what is happening to deal with it explained in full”:

“So bad is Sri Lanka’s position that Wickremesinghe has stated that he has been unable to produce a recovery budget of any kind for at least a further six weeks, having been appointed to the role as PM on May 12. That has been due, he has stated, because of a complete lack of records at numerous Ministries for numerous economic indicators. There is apparently no actual account of Sri Lanka’s true debt position (estimated at US$51 billion).

Wickremesinghe has archly pointed out that the previous two Finance Ministers, Mahinda and Basil Rajapaksa, brothers of the current President, had little to no knowledge of banking or economics. The lack of record keeping suggests even worse – disappearing paperwork is usually magicked away to cover up fraud.” (Asian Debt Traps: This Is What Happens When A Country Defaults - Silk Road Briefing)

How bad are things really? And who is responsible? Has there been a violation here of our fundamental rights as citizens? How on earth was it possible to continue engaging in the same fraudulent practice, year after year, even after it was discovered? 

Confirmed by the Auditor General

This was no exaggeration by an irresponsible media. The Auditor General gave a qualified opinion on the accounts of the Finance Ministry from 2013 to 2016.

The Daily FT reported in 2016 that “To by-pass the regulation in Fiscal Management (Responsibility) Act imposing a ceiling on national debt to be 80% of GDP, officials in the previous government kept loans out of the balance sheet of the Finance Ministry, and instead instructed different institutions to obtain loans individually.” 

It further quotes the Auditor General as having claimed that the Secretary to the Finance Ministry had instructed other Ministry Secretaries and officials to keep certain loans off their balance sheets, adding that “Even certain loans which were not possible to be kept out of [the] Finance Ministry balance sheet were transferred to other institutions, which is illegal”.

He identifies loans up to Rs. 826 billion being taken off the balance sheet of the Finance Ministry at the time: Rs. 116 billion to finance Mattala Airport construction, three loans taken to finance construction of Hambantota amounting to Rs. 142 billion and Norochcholai power plant amounting to Rs. 166 billion. 

The Auditor General seems to have feared that this was only the tip of the iceberg. He noted that “… there are loans totalling trillions, which we will uncover as we go on. The main one is the bond. The Finance Ministry does not record the face value of the bond issued, but when it matures we have to pay the amount. But this is not in our records now, and it is difficult to rectify this immediately,” he said.  (Auditor General drops bombshell | Daily FT). 

Let’s look at Mozambique

The UN Human Rights Council’s Rapporteur on Extreme Poverty recorded an example of a country where the IMF considered corruption to be “macro-critical”. That example was Mozambique, where he said “…enormous loans made to State-owned enterprises were concealed.” [A/HRC/38/33]

What happened in Mozambique? 

Between 2013 and 2014, three Mozambican state-owned companies borrowed $ 2.08 billion in loans. Although allegedly meant to finance maritime surveillance, fishing and shipyard projects, “No projects materialized, and the operation is believed to have covered up extensive corruption for the benefit of people close to the government. The debts were concealed from the public and the international community, which finances a big part of the Mozambican national budget. Western donors temporarily suspended financial aid. Maputo had to stop repaying debts. Its metical currency collapsed, resulting in the country’s worst financial crisis since independence in 1975.” (Mozambique: ′Hidden debt′ trial exposes depth of corruption | Africa | DW | 01.09.2021)

They discovered the scandal in 2016 and five years later the trial has opened in Maputo. The 19 defendants include the son of the former President, Armando Ndambi Guebuza. The Africa Report [www.theafricareport.com] says, “Filipe Nyusi, the current President, who was Minister of Defence at the time of the events, is cited by several of the accused as a key figure in the case. However, he will not appear before the court and continues to deny any involvement.”

This fraud has cost that country the “equivalent of 70% of GDP in 2019”, according to the report. 

Have we learnt our lesson?

Where are we in Sri Lanka, today? Has the Ministry of Finance cleaned up their act? Not in the least. 

The new Auditor General has reported this year, 2022, that “Certain amount of loan out of the loans the Government had continued to obtain over the past few years had not been entered in the statement of financial position related to the year … It was observed that the incorrect information…is given to the users of these financial statements including the Parliament.” [Financial Management and Public Debt Control in Sri Lanka 2018-2022]

He says that Rs. 79 billion in 2019 had not been considered in the computation of the borrowing limit.” 

He has even included that old favourite, the Hambantota Port, in his 2022 report: “It was observed in some instances that debt balances realized during the year had not been correctly accounted as debt, specially, the loan taken by the government to construct the Hambantota Port is not appearing in the financial statements of the government or Port Authority. Accordingly, as a formal methodology has not been introduced to accurately record the total debt balance, it is emphasized the need of introducing such a methodology.” [Financial Management and Public Debt Control in Sri Lanka 2018-2022]

The Report tabulates a series of hidden debts running across several state-owned-enterprises amounting to Rs. 289,357,938,535. 

From the Report of the Auditor General on Financial Management and Public Debt Control in Sri Lanka 2018-2022, Page 343.  

The Auditor General notes that “not recording of the foreign loan balances…to be settled in foreign currencies as liabilities in the financial statements of the Government is observed as a problematic situation”. That is surely the understatement of the year, and the decade so far. 

He identifies that it was the “failure of the General Treasury to follow and/or introduce and properly regulate a definite and an accurate accounting policy has contributed in the emerging of all the aforesaid informal and problematic situations.” 

Accountability for economic crimes

If as the Auditor General concludes, that foreign debt concealment contributed as part of the overall mismanagement of finances to the current crisis that plunged the country into bankruptcy, the people into poverty and hopelessness, and every aspect of life into crisis, shouldn’t those who were responsible be held accountable? 

Were they less or more responsible than the desperate protesters who were the victims of such dastardly conduct, who are now being rounded up and questioned, arrested and detained? 

What makes the political elite and some of the bureaucracy who knowingly and cynically engaged in such fraudulent behaviour, immune from prosecution while their victims, the citizens are regularly intimidated by law enforcement authorities? 

What’s to stop those with the opportunity, from continuing to defraud on this massive scale, and get clean away?