Heightened fears over Sri Lanka's vulnerability to foreign debt

11 Jun, 2014 10:15:39

June 11, 2014 (LBO) - Sri Lanka may be more vulnerable to foreign debt than generally believed, amid rising foreign borrowings by both the state, state enterprises and also private entities, economists have said.

Harsha de Silva, an economist and legislator said when parameters developed by UN's Economic and Social Commission for Asia and the Pacific were applied to overall external debt; Sri Lanka appeared to in the safe zone according to official calculations.

Though the Central Bank had released a statement in May based on US-ESCAP debt indicators which appeared to show Sri Lanka was a less indebted country, he said other calculations showed that the situations was much more vulnerable.

He said the central bank calculations showed that Sri Lanka was moderately indebted when disbursed outstanding foreign debt was compared to gross national income at 37 percent.

But if foreign debt of state enterprises, banks were considered as indicated in a manual by UN-ESCAP indebted rose to 61 percent with external debt rising to 39.7 billion US dollars instead of 23 billion US dollars.

W A Wijewardene, a former deputy Central Bank Governor has made a detailed analysis on the matter on his weekly column in Sri Lanka's Daily FT newspaper.

In another indicator which measured the disbursed debt against exports of goods and non-factor services, the Central Bank's calculations showed a ratio of 106 percent.

But when re-calculated it indicated a ratio of 265 percent, which was in the upper band of moderately indebted and just on point of reaching highly indebted at 275 percent or more.

"I don't want to accuse authorities of falsification or intentional misleading, but this is of national importance and I am raising questions," de Silva told reporters in Colombo.

"The question is whether we are far away from the cliff or just about the edge of the cliff."

Total external debt service payments to exports of non-factor services were placed at 11.2 percent but when re-calculated it went up to 25.2 percent, de Silva said. At 30 percent, a country was considered 'highly indebted.'

The International Monetary Fund has also warned Sri Lanka on rising foreign debt. Sri Lanka's central government, state banks and state enterprises have been borrowing in international markets, with explicit and implicit state guarantees.

Some of the borrowings by state banks have been directly on-loaned to the Treasury, and it is not clear whether such dollar borrowings from domestic entities should be discounted.

The UN-ESCAP's method of excluding non-factor inflows may also be questionable, some analysts say, particularly in the case of Sri Lanka, where the state in fact directly borrowings savings of expatriate workers though dollar bonds issued to dollarized banking units.

But in the past few years, Sri Lanka has been tapping commercial capital markets with billion US dollar bonds which have bullet repayments, unlike the install payments of loans given by friendly governments or multi-lateral lenders.
Meanwhile De Silva said if Sri Lanka's gross domestic product was overstated as feared, the situation would be much worse.

Sri Lanka switched its national income accounting model with a lower weight for agriculture, with the agency also shifting from the Central Bank to the census departments making a 0.5 percent annual gain in growth.

Fears of inflated GDP has been underlined with overall state revenues also failing to respond to apparently higher economic growth, despite the visible tax burden on the public rising.

All Sri Lanka's public investments have been made by debt since the late 1980s, with current spending alone exceeding total revenues.

Questions have also been raised on some recent investments made with foreign debt, especially from China where feasibility has been questioned.

Under a policy pushed by Janatha Vimukthi Peramuna party, about a decade ago Sri Lanka has expanded the public sector and subsidies to special interest groups, reversing a consolidation path the country followed since about 1995.
The state started giving jobs to tens of thousands of unemployable graduates making them tax spenders for life, and military spending is still high despite the end of a war.