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For example, in a country like Sri Lanka, it is generally accepted that worker remittances could be considered as a steady stream of foreign exchange which could be used to service external debt obligations, whether public or private. At the same time, it must be noted that the UNESCAP indicators are not forward looking measures, as these take into account historical perspectives only, and make assessments of current external debt parameters, in contrast to certain other benchmarks.
In this regard, the Debt Sustainability Analyses conducted by the IMF and World Bank are perhaps more forward-looking assessments, which apply various scenario analyses to assess future debt dynamics of member countries, particularly as to whether countries could encounter different shocks, such as exchange rate changes, interest rate fluctuations or output interruptions.
Central government-related information
Two chapters of the Central Bank Annual Report present information on the external sector and central government, where the focus of the relevant chapters are on sector specific recent trends. In that regard, it is well known amongst all practical analysts who follow the Central Bank releases, that the press releases and information published by the PDD of the Central Bank always relate to the central government.
Since it is untenable to assume that anyone who has held a high position at the Central Bank would not have known that fact, the current debate which is based on whether the PDD press releases refer to the central government debt or not, only serves to confirm the Practical Economist’s contention during the earlier debate on per capita income, that Wijewardena’s recent articles are politically-biased.
Fiscal policy
The rationale for managing public debt, both domestic and external, at sustainable levels is a matter of fiscal policy. The key measure of fiscal prudence is the annual fiscal deficit as a percentage of GDP, and the total outstanding central government debt as a percentage of GDP.
In that context, the analysis of recent macro-economic indicators shows that in Sri Lanka it has been improving steadily and consistently over the last eight years. The fiscal deficit is now at 5.9%, while the Debt of GDP ratio is 78%, compared to a fiscal deficit of almost 10% and a debt to GDP ratio of over 104%, in 2004.
External debt status
In this background, since the current debate is about an “imminent” external debt crisis as warned by Wijewardena, it would be useful to consider the trends in the central government’s external debt status, to ascertain whether there is actually such an imminent external debt crisis.
The background facts are as follows: In 1989, the total government external debt as a percentage of GDP was at its highest level at 62%. In fact, that level was even higher than last year’s total public and private external debt of the country! In contrast, by the end of 2013, the central government’s external debt was at only 34.1% of GDP, which was the lowest since 1982 except in the year 2008.
Strangely, Wijewardena did not see the 1989 debt levels as being alarmingly high during those times, but now, he and several other analysts make comments as if they have never seen worse periods in the past! Worse still, not only were there high levels of external debt during those days, but all other macro-economic fundamentals too, were highly unfavourable.
Sri Lanka suffered from a chronically depreciating currency at around 10% each year: inflation was, by and large, at double digit levels; growth was depressingly low; the external current account was at a massive deficit; the fiscal deficit was at unacceptable levels; and foreign reserves were pathetically low and barely able to finance even one month’s imports.
Needless to say, such macro-economic imbalances would have made Sri Lanka’s external debt exceedingly vulnerable to imminent debt crises over many of those years, but Wijewardena somehow did not seem to think it was necessary to alert anyone about the then prevailing macro-economic environment and outlook, during those difficult times.
Debt service burden
In the meantime, an argument may also be put forward that the external debt in the past was largely on concessional terms, and therefore the debt service burden was less. This is a valid contention and needs to be considered in this debate.
When doing so, it would be seen that when a country’s per capita income rises, it is a natural progression for such country’s concessional financing to also correspondingly diminish. As a result, the share of commercial and private external financing rises, since the country is attempting to increase its growth potential continuously, so that it could pay back its debt obligations comfortably, with the enhanced revenues based on the expanding economic activity.
In this background, in recent times in Sri Lanka, it is seen that the increased share of commercial debt has served to increase the capacity and growth potential of the country, by way of new ports, airports, power plants, expressways, regional and rural roads, as well as better telecommunication, water, electricity and other utility services.
In this context, even reluctantly, Wijewardena may have to admit that, during the periods of higher central government external debt (although on so-called concessional terms), there was hardly any infrastructure development other than the accelerated Mahaweli scheme. Further, he would also have to acknowledge that as a result of the then so-called concessional financing, there were hardly productive public investments financed out of such concessional financing. In fact, a large part of the so-called concessional financing was used to either import consumer durables or food.
It is now well-known that Sri Lanka borrowed $ 792 million from the USA at high rates of interest to buy wheat to eat bread from 1965 to 2001! Further, some of the loans were used to pay for consultancy services from certain so-called ‘donor’ countries for various projects, some of which never saw the light of day! Therefore, since such external financing did not increase the country’s productive capacity, subsequent governments had to deal with the legacy of low revenue generation, in order to service the amortisation and interest of these unproductive concessional financing in the years that followed.
Ironically, those who were responsible for giving advice to the previous governments to squander external financing in that manner, are now blaming the current administration for higher debt service payments!
Private external debt
It would also be useful to now discuss the economic rationale for rising private external debt of any emerging market economy, as well as the overall economic implications of such a situation, in an objective manner.
Until 2010, the private external debt in Sri Lanka was around or below 10% of GDP, which was approximately 25% of the total external debt. This was mainly due to two reasons. First, there were severe restrictions on external borrowings by the private sector as Sri Lanka’s capital account was largely closed for private debt capital. Second, even under case-by-case approval processes for external borrowings, there were not too many large scale private sector entities which could borrow internationally on the strength of their balance sheets.
Both these factors have changed considerably over the past few years due to the rapid expansion of the economy, the ushering of peace, the improvement of the country’s macro-economic fundamentals, and the gradual and timely relaxation of capital controls in the recent past. As a result, the private sector, especially those who earn income in foreign exchange, have made use of the opportunity to access global financial sources, and have enhanced their borrowings from abroad at competitive rates. This has, in turn, led to the private sector external debt now rising to around 25% of GDP, which is about 40% of the total external debt.
This phenomenon could perhaps be viewed as a natural transition of debt dynamics in any emerging and improving economy, and if any economist were to suggest that this evolution is an “imminent debt crises”, then a majority of advanced economies of today should be facing major debt crises owing to this condition, judging by their current status.
For example, the total external debt as a percentage of GDP in USA (98%), UK (373%), Canada (73%), Australia (86%), Germany (373%) and New Zealand (111%), indicate that the levels of external debt in those countries have been increasing to very high levels, and that those levels have also been much higher than that of Sri Lanka.
In many of these countries, the shares of private external debt too, has been ranging from 60% to 90% of total external debt, which is also considerably higher than the corresponding figure in Sri Lanka. Further, the total weighted average external debt of OECD countries is 105% of GDP, of which more than 70% is their private external debt!
Favourable and sustainable debt dynamic
It must also be stated that private sector external debt is obtained on the basis of the strength of the balance sheets of the borrowing companies, or the viability of projects. Therefore, such external debt is considered to be more sustainable, and the steady progress of the above named countries to their current levels of growth, without any debt crises, clearly suggests that it is a favourable and sustainable debt dynamic that is necessary for a country to progress.
Sri Lanka is now moving in such a direction via the careful consolidation of the central government’s debt position through fiscal prudence, while also allowing the private sector to participate more fully in the economy via foreign savings. That strategy is an economically sensible and rational strategy, and the Sri Lankan authorities, particularly the Central Bank and the Ministry of Finance, must be commended for taking such progressive steps in the positioning of Sri Lanka’s economy in this evolving environment.
Finally, it must be stated that Wijewardena’s current shrill warnings that Sri Lanka is now drifting towards an “imminent debt crisis” is not a tenable or valid contention and all data and information point to an entirely different outcome. This is further borne out by the fact that none of the independent agencies such as the IMF, World Bank, ADB, international rating agencies, and international banks who conduct research on Sri Lanka, have given any warnings of such an imminent debt crisis in the foreseeable future in Sri Lanka. This obvious contradiction effectively lets the cat out of Wijewardena’s bag!
