Rajapaksa regime caught in the foreign debt trap

In the backdrop of Sri Lanka’s mounting debt, both domestic and foreign that had increased manyfold, the issue of financial discipline in borrowing patterns has resurfaced yet again.

Dollar Note SackThe Committee on Public Enterprise (COPE) and the Public Accounts Committee (PAC) have repeatedly highlighted Sri Lanka’s mismanagement of public funds and associated corruption while lending organisations such as the World Bank and the International Monetary Fund (IMF) have regularly cautioned the island over its style of spending that is not target specific, thus leading to further borrowing.

The island’s indebtedness has steadily grown over the past decade and the forecast for the next five years, according to analysts is of extensive borrowing, given that the country is likely to seek foreign funding in mammoth proportions to launch ambitious development projects primarily in the north and elsewhere.

In this light, it becomes important to understand not only Sri Lanka’s borrowing patterns, the lending institutions or the countries that played a decisive role in Sri Lanka’s economy but also to understand how difficult it has become to repay the debts.

Debts written off

“Some of the debts have been written off of course, as bad debts. But Sri Lanka intends paying every cent borrowed. The state is not a defaulter,” says Deputy Finance Minister Ranjith Siyambalapitiya.

Sri Lanka’s borrowing, both domestic and foreign has a history of its own. It is a recorded fact that post independence, Sri Lanka first borrowed in 1950. In the aftermath of independence, both in 1948 and 1949, Sri Lanka did not resort to any kind of borrowing.

Borrowing commenced in 1950. Sri Lanka then resorted to Rs. 529 million foreign borrowing and Rs 125 million of domestic borrowing, totaling to Rs. 654 million. The next year, in 1951, foreign borrowing increased to Rs. 625 million while domestic borrowing remained at Rs. 125 million. The total was Rs. 751 million.

The year after — 1952— it had risen to Rs. 852 million domestic while foreign borrowing increased to Rs. 192 million making a total of Rs. 1,044 million.

Borrowed from external agencies

According to recorded financial history, the Sri Lankan government borrowed from external agencies and countries for the first time in June 1954 under the leadership of Prime Minister Sir John Kotelawala. Lord Soulbury was Sri Lanka’s then Governor General.

The borrowing took a quantum leap with the change in economic policies when President J. R. Jayewardene liberalised the economy with the intention of putting Sri Lanka on the road to rapid economic growth.

Sri Lanka resorted to its first commercial borrowing in US dollars on June 15, 1979 with President Jayewardene at the helm of affairs.

Similarly, the first US Dollar Treasury Bond was issued on November 1, 2001 during the tenure of President Chandrika Kumaratunga who was also the finance minister at that time.

Total debt

According to Central Bank figures, the total of Sri Lanka’s debt as at August 31, 2008 stood at Rs. 3,301,197 million while domestic debt was at Rs. 1,916,161 million. Foreign debt as at August 31, 2008 was Rs. 1,385,036 million. It is noteworthy that per capita debt as of August 2008 stood at Rs.163,425.00

Among the institutions that played a massive role in Sri Lanka’s economy as lenders are the World Bank (WB) and the International Monetary Fund (IMF). Among the countries are the US, European nations and Japan, countries that have maintained a strategic or economic interest in Sri Lanka.

Yet, most of the debts have not been settled with interest accruing on the same. In year 2008 alone, Rs. 2,289.57 million owed to the World Bank had not been settled with interest. Graph 2

Similarly, for the Asian Development Bank (ADB), some Rs. 2701.64 million is due with interest.

Debt repayment is becoming a massive constraint for Sri Lanka, already having to deal with depleted resources and slow responses to repeated calls for foreign funding. Sri Lanka’s record in repayment appears uninspiring.

Commitments not honoured

The United States alone, in 2008, Sri Lanka should be repaying Rs. 458.65 million together with interest. But the records bear testimony to the fact that the commitment had not been honoured.

To Japan, the amount is Rs. 3,455.69 million with interest while to China, it is Rs. 2,701.64 million with interest.

Bad economic management would not only lead to additional borrowing but also other practices such as printing money, notes UNP legislator Ravi Karunanayake.

A response offered to an oral query raised by Karunanayake in parliament on currency printing in Sri Lanka too sheds some light on the island’s financial crisis that are likely to intensify if funding does not come sooner than later.

According to the above parliamentary response, the total value of currency notes newly printed and issued by the Central Bank from November 2005 to November 2008 provides a clue to the country’s prevailing economic concerns.

Withdrawn from circulation

Accordingly, the face value of the total new currency notes issued is Rs. 124,581,060,000 while the value of notes withdrawn from circulation stands at Rs. 72,701,010,370 making the net value of notes added to the circulation to stand at Rs. 51,880,049,630

The above currency notes, as per parliamentary records have been printed at a cost of Rs. 2,224,671,709 while the underlying seigniorage or the net revenue derived from issuing coins or currency notes remains at a mammoth Rs. 49,228,094,549.

Through the printing of currency notes and minting coins, some Rs. 8,000 million had been transferred to the Consolidated Fund in 2007 and another Rs. 4,000 million in 2006. While in 2005 this exercise was not carried out, the Consolidated Fund received Rs. 5,565 million in 2004 and Rs. 3,500 million in 2003 from the money printing exercise.

As the country waits with bated breath for the IMF tranche to come and make the passage somewhat smooth for a war battered economy, the island’s record of non-payment of debts is a record that could go against the country. It is not just about failures to honour commitments with regard to national borrowing. It has much more to do with financial indiscipline and erratic spending despite the monies coming for specified projects complete with guidelines, and of course a nation that is neck deep in foreign debt.

By Dilrukshi Handunnetti

Sunday Leader – 28 June, 2009

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