The Debt Trap – A myth, Reality Or Political Propaganda?

By Abdul Samad –March 30, 2017 

Abdul Samad

Leading up to the presidential elections in January 2015, national debt was a major topic of discussion. It was considered as a major failure of the Rajapaksa regime, and was used as political propaganda by the unity government to influence voters. The objective of this article is to understand the gravity of this issue.

Generally, national debt of any country is measured as a percentage of its GDP. It reflects the ability of a country to repay its debt without requiring further assistance. Any financial institution or a government, prior to assisting a country considers two major factors. Present debt level and the potential of growth. An article published by Business Insider U.K. in Oct. 2015 listed out seventeen countries with the highest debt levels. Below table gives the information together with GDP growth of the countries.It comes as a surprise that Japan ranks as number one. It’s the third largest economy in the world. Bank of Japan currently has a negative interest rate monetary policy aimed at spurring growth. It continues to add stimulus in the form of mortgage backed securities and various other tools. Thus, expanding the balance sheet of the central bank adding to national debt. The above table also suggests, most of the countries do not experience robust growth. This questions their ability to re-pay debt. Does it mean the above countries are worse off than Srilanka? Singapore is considered as the economic miracle of the last fifty years. It was also one of the active participants from the Asian region to negotiate the Trans Pacific Partnership (TPP) with the United States of /America, a landmark trade agreement. Such is its economic presence in the region. Do Srilankans enjoy a better quality of life than the Singaporeans? It is worth noting, there are some European heavyweights in the above table. Sluggish growth is a common factor. The European Central Bank akin to the Bank of Japan currently adopts a very accommodative monetary policy aiming to achieve economic growth. The Federal Reserve of the United States of America raised rates in its last policy meeting, only for the second time since the 2008 financial crises. Almost a decade of accommodative monetary policy has ensured the lowest unemployment rate (under 4%) since 2008. Has excessive debt stopped America from being the largest economic superpower of the world? The result of such monetary policy has led to vibrant capital markets. Dow Jones is at record high levels akin to all major European indices. The bull market in America is nearing a decade. It is often the case with most of these countries that the capital market performance is a fair reflection of the economy’s performance.

Now, let us look at Sri Lanka and some of its peers in the SAARC region. The below table provides the information.Comparing India and Srilanka would not be right, two different economies with different geographical settings and size. The difference is too much to put it into perspective. Nonetheless, it’s worth mentioning that compared to Sri Lanka, India faces far greater Economic development challenges. It’s always vulnerable to socio-economic shocks more than Srilanka. Its large domestic market acts as a shield against global economic shocks. India’s growth is much driven not by its efficiency, but by its sheer size of the domestic market. Domestic politics and the media are two main obstacles to radical economic reforms. With Modhi in power, things are looking much better on the economic front. Does debt stop India from being the fastest growing major economy in the world?

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