Government’s 2021 Budget places country on path to unsustainable debt

Tuesday, 24 November 2020 00:21 -     - {{hitsCtrl.values.hits}}

The presentation of the 2021 Budget by Prime Minister Mahinda Rajapaksa was the first proper indication of the Government’s plans for a post COVID-19 recovery. Unfortunately for the flailing public there appears to be no clear strategy on alleviating the economic crisis. Instead the Government has turned its attention to increased borrowing to help keep itself above water


The COVID-19 pandemic has seen global economies enter unchartered territories, with many countries facing the task of restarting economic activities that had come to a complete standstill. Experts predict that the potential of a drawn out second wave of the virus coupled with anxiety and uncertainty amongst the populaces will see global economies face a downturn similar to that of the Great Depression of the 1930s. 

The economic situation in Sri Lanka is dire. This past week saw videos shared on social media of previously prominent shopping centres in Colombo now devoid of shoppers. Shop windows were covered with signs announcing ‘space for rent’. The halt of spending by the public has resulted in many small shop owners forced to abandon their businesses. 

With many industries in Sri Lanka being adversely impacted by the outbreak of the virus, and subsequent lockdowns, the public has turned to the Government for answers. 

The presentation of the 2021 Budget by Prime Minister Mahinda Rajapaksa, in his capacity as Minister of Finance, on Tuesday (17) was the first proper indication of the Government’s plans for a post COVID-19 recovery. Unfortunately for the flailing public there appears to be no clear strategy on alleviating the economic crisis. Instead the Government has turned its attention to increased borrowing to help keep itself above water.

The Budget has seen a greater emphasis placed on increased borrowing. Accordingly Government expenditure for 2021 has been estimated at Rs. 3,525 billion (Rs. 3.5 trillion), which is a reduction from Rs. 4,470 billion (Rs. 4.5 trillion) in 2019. Despite Government expenditure reducing next year, the borrowing limit has been increased to Rs. 2,900 billion (Rs. 2.9 trillion) from Rs. 2,200 (Rs. 2.2 trillion) in 2019. 

With revenue for the year estimated at Rs. 1,961 billion, the country is facing an increased budget deficit. Coupled with increased borrowings, the debt sustainability of the Government’s financial model has come under scrutiny. The absence of a clear plan to increase the revenue of the Government has led to further questions over the Budget presented by Mahinda Rajapaksa.

The biggest question that has arisen is, how will the Government service the growing debt repayments, which is estimated at $ 4.3 billion annually for the next four years? 

The country’s foreign debt obligations for 2021 is estimated to be between $ 4.6 billion and $ 5.2 billion (depending on the foreign exchange rates). In August this year the Government announced that the country’s foreign reserves stood at $ 7.4 billion. However, since the $ 1 billion repayment of the International Sovereign Bond in October, there has been no indication of where the country’s foreign reserves stand. 

With the global markets having come to a standstill due to COVID-19, many of Sri Lanka’s foreign revenue streams have dried up. The country’s largest foreign exchange earners have been the migrant workers in the Middle East. Due to the COVID-19 pandemic in those countries remittances have reduced throughout the year. It is estimated that a reduction of 14.6% ($ 978 million) will be incurred by the country in 2020 as compared to the previous year. This is mainly due to many migrant workers forced to return home, while those seeking jobs overseas has also reduced.

Apparel earnings have been forecast to experience anywhere between a $ 1.3 billion and a $ 2 billion reduction this year. Export earnings from tea exports have also reduced by Rs. 12 b in the first nine months of 2020 compared to the corresponding period in 2019. While the volume exported has also reduced, the first nine months of 2020 had seen a 22.8 Mn KG reduction in tea exports compared to the corresponding period last year. 

Speaking to the media last month the State Minister of Money, Capital Market and State Enterprise Reforms Ajith Nivard Cabraal stated that the Government was exploring all options of meeting the necessary debt repayments for 2021. The absence of any clear plan in the Budget presented to Parliament this last week suggests that the Government is still searching for an answer.

At that same press conference, the State Minister suggested that the Government’s foreign reserves would experience an estimated $ 2 billion savings due to the ongoing import ban and reduction in the country’s fuel bill. However, on Thursday (19) the European Union released a statement flagging concerns with the Government’s continued pursuance of the ban on imports. “Trade, however, is not a one-way street. The current import restrictions are having a negative impact on Sri Lankan and European businesses… We recall that a prolonged import ban is not in line with World Trade Organisation regulations.”

With the EU being the country’s second biggest export market in the world, this will certainly pressure the Government to reconsider their policy of banning imports. In the event the ban is lifted, then the country’s foreign reserves will face a reduction that the Government appears unprepared for. 

Speaking in Parliament earlier this month Cabraal stated that the country would not go to the IMF and seek their support in handling the pending debt repayments, but would instead seek alternative arrangements. Whether the Government is able seek financial assistance from the international money lenders remains to be seen. The risk premium for the country has increased due to the reduction in the country’s credit ratings 

Cabraal did suggest that China would be an option for the country, however, whether China will continue to provide the necessary financial support to service the growing debt is not assured. 

Speaking during the presentation of the Budget, Prime Minister Rajapaksa highlighted one avenue that the Government was turning to in order to shore up its foreign reserves. “I request from all entrepreneurs to utilise the funds hidden locally or internationally in order to evade laws relating to taxes and foreign exchange.” 

The Prime Minister’s apparent call out for the investment of black money in the local economy will no doubt raise concerns among both foreign investors and international financial watchdogs. In fact it was only in October last year that the Financial Action Task Force delisted Sri Lanka from the ‘Grey List’. Former Finance Minister Mangala Samaraweera was quick to flag this and raise the question as to whether a move like this would undo the progress made by the country’s financial institutions. 

As mentioned earlier Sri Lanka’s Government is in unknown territory due to the COVID-19 pandemic. However, those who looked to the Budget as a sign of light at the end of the long dark tunnel have been left disappointed. An emphasis on borrowing with no plan to ensure debt sustainability suggests that the country may very well fall into an uncontrollable debt trap. 

Recent columns