Sri Lanka Total Debt Stock by Rs. 836 billion so far

My brief comment was made with the purpose of highlighting the serious ramifications surrounding the present rapid and (perhaps) deliberate policy of Rupee depreciation which is gripping the people of our country and sending shock waves across the entire economy.

by Ajith Nivard Cabraal- May 3, 2018

( May 3, 2018, Colombo, Sri Lanka Guardian) * Increase in the Total Debt Stock due to the Depreciation of the Rupee since the Yahapalanaya government came to power, reaches a staggering Rs. 836.0 billion, which is equivalent to over six times the amount borrowed to construct the Hambantota Port.

* Self-proclaimed Economic Guru of the current government who used to be greatly agitated when the Sri Lankan Rupee depreciated by even 10 cents against the USD during the Rajapaksa era, has asserted that the recent Rupee Depreciation is “beneficial” to the economy and the country.

* Government will have to allocate more funds in Sri Lankan Rupees for the same Forex repayments in Rupee terms when the Rupee depreciates, since the Government will have to “buy” the required Forex from the market or the Central Bank has to settle the Forex loan instalments and interest payments.

* Central Bank has a statutory duty to maintain “economic and price stability” and therefore, has “to maintain the international stability of the Sri Lanka Rupee and its free convertibility for current international transactions”, as per the Monetary Law Act.

* People of Sri Lanka have a right to be appraised of the damage to the country and the economy, if the authorities do not manage the economy and the exchange rate in a balanced and sensible manner.

*Attitude of the present economic authorities who appear to be highly comfortable with the current depreciating trend of the Rupee, is of great concern.

*Authorities seems to be implementing a deliberate policy of depreciating the Sri Lankan currency rapidly, which may drive stakeholders towards panic-driven actions, which may further affect the now-fragile economy.

In its Annual Reports of 2015, 2016 and 2017, the Central Bank sets out the “increase in the total debt stock” due to “the depreciation of the rupee against several major currencies”. Table 1 sets out such data.

Table 1: Increase in Debt Stock due to Depreciation of Rupee ( Source: CBSL Annual Report )

Year	Rupees Billions
2015	285.1
2016	186.6
2017	225.2
Total	696.9

The total Forex Loans Outstanding as at the end 2017, as per the Annual Report 2017 was Rs. 4,719 billion in Rupee terms, or USD 31.4 billion in US Dollar terms. The Central Bank has also stated in a statement on 26th April 2018, that the Sri Lankan Rupee has depreciated by 2.9% against the USD up to 25th April 2018. On that basis, the increase in the Total Debt Stock due to the Rupee Depreciation during 2018, could be computed as being a further Rs. 139.1 billion upto 25th April 2018.

Accordingly, the total increase in the Total Debt Stock due to the Depreciation of the Rupee since the Yahapalanaya government came to power, would be staggering Rs. 836.0 billion, which has been already added to the Sri Lanka Government’s total debt stock, without being represented by a corresponding asset.

In this context, it may be recollected that in the past, the allegation levelled at the previous Government by the current Government’s “economic experts” was that certain infrastructure assets which they claimed were “under-productive” were financed with loans and added to the country’s asset stock, thus burdening the people. Nevertheless, there was no dispute that physical assets had indeed been added to the country’s infrastructure, while the total debt stock was increasing. For example, with the Hambantota Port being added to the asset stock of the country, a loan of approximately USD 1,100 million (Rs.132 billion) from China was added to the debt stock. In this regard, it is now clear that significant value had also been received by the country in respect of such funds borrowed by the previous Government, since the current Government has now apparently negotiated to “sell” a 60% stake of that asset, at the same cost as incurred by the previous Government to construct the entire asset.However, in stark contrast, even after a sum of Rs. 836.0 billion (which is equivalent to over 6 times the amount borrowed to construct the Hambantota Port) has been added to the “debt stock” of the country, no asset has been added to the “infrastructure asset stock” of the country. As a further comparison, it may be noted that the total tax collected by way of Income Tax and VAT in 2017 of Rs.719.0 billion was less than the above addition to the Debt!

A recent statement by the Central Bank has claimed that “as loans are obtained in foreign currency, these loans and interest component can be settled with income received in foreign currency, or with additional loans obtained in foreign currency”. What has however not been said in that statement is that the Government will have to allocate more funds in Sri Lankan Rupees for the same Foreign loan repayments in Rupee terms as and when the Rupee depreciates, since the Government will have to “buy” the required Forex from the market or the Central Bank, in order to settle the Forex loan and interest payments.

As is well-known, the Government makes an appropriation of the funds required for the servicing of the Public Debt each year. When doing so, the Ministry of Finance computes the loan amounts due and the interest payable on the Forex loans, based upon the expected exchange rate in the coming year. Thereafter, as and when repayments and interest payments fall due, the Government “purchases” Forex from the Central Bank Reserve with Rupees, and settles the Forex loans in the foreign currency. At the same time, as and when possible, the Central Bank replenishes the Forex in its Reserve, by “purchasing” Forex from the Forex Market. Accordingly, it will be clear that additional Rupee funds needed due to the Rupee depreciation will have to be raised by the Government at the time of repayment of the Forex loans, which, in turn, means that the Government will have to further tax the people who are already reeling under the new tax regime, or borrow new funds (in Rupees or Forex), to meet those obligations. Hence, the claim as reported as having been made at a recent media conference by the Central Bank Governor to the effect that the Central Bank settles the Government’s foreign currency loans with the Central Bank’s existing reserves, and therefore there is no impact on the exchange rate is simply untenable, because the Central Bank itself will have to “purchase” Forex from the market, as and when required, so that it will be in a position to provide such Forex to the Government to enable the Government to settle its debts.

As per the Monetary Law (MLA) the Central Bank has a statutory duty to maintain “economic and price stability”. In so doing, it has “to maintain the international stability of the Sri Lanka Rupee and its free convertibility for current international transactions”. Sections 66 (1) and 66 (2) of the MLA provides useful guidance as to the factors that need to be considered in “International Monetary Stabilization”, which inter alia, states that the Bank must give consideration to “the volume and maturity of the foreign exchange assets and liabilities of the Government and of banking institutions and other persons in Sri Lanka” in this endeavour. It follows therefore that any effort to determine the exchange rate on the basis of imports and exports only, and thereafter attempting to maintain such exchange rate through the purchase or supply of Forex using the Central Bank Reserve, could sometimes be quite detrimental to other key macro-fundamentals and may even be a violation of the provisions of the MLA. Therefore, instead of being guided by ad-hoc or knee-jerk or IMF-imposed dictates, the Central Bank would do well to give the signal to the world that it is responsive to the diverse needs of the different stakeholder-interests within the economy and act accordingly.

In a recent statement, a self-proclaimed economic guru of the current government who used to be greatly agitated when the Sri Lankan Rupee depreciated by even 10 cents against the USD during the Rajapaksa era, has asserted that the recent Rupee depreciation is “beneficial” to the economy and the country. Of course, this “expert” is quite entitled to bask in a “Fool’s Paradise” and claim that the depreciation of the Rupee does no harm to the economy. Nevertheless, the people of the country have a right to be appraised of the damage that will be suffered by the country and the economy, if the authorities do not manage the economy and the exchange rate in a balanced and sensible manner. That was the reason as to why, as a former Governor, I issued the following statement to the media on 25th April 2018:

“During the past one week, the Sri Lankan Rupee has depreciated Rs.1.58 (from Rs.157.46 to Rs.159.04) against the USD. Since the foreign debt of Sri Lanka is approximately USD 30 billion, the depreciation of the currency during the past week has increased the total public debt by around Rs.47 billion. To understand such debt increase in perspective, the following facts are relevant:

a) The investment on the Colombo-Katunayake Expressway was Rs.48 billion

b) The investment on the Mattala airport was Rs.30 billion

c) The expenditure in 2014 for the Samurdhi benefit and the Fertilizer subsidy was Rs.47 billion

The above simple comparison shows the extent to which the current Government is leading the Sri Lankan economy to ruin…”

My brief comment was made with the purpose of highlighting the serious ramifications surrounding the present rapid and (perhaps) deliberate policy of Rupee depreciation which is gripping the people of our country and sending shock waves across the entire economy. It was also meant to prompt policy makers to take cognisance of the current alarming situation and arrest the damaging trend, which is pushing our economy towards ruin. If however, the “economic experts” of the current administration truly believe that it is beneficial for the Rupee to continue its rapid depreciation, and even believe that the Central Bank Foreign Reserves are generated out of thin-air without having to be paid for with Sri Lankan Rupees at the prevailing exchange rate, then such “economic experts” may continue their present policy framework, without worrying about my comments.

In any event, I now firmly believe that it is not possible to convince or attempt to convince these “experts”, and that is why I decided to appraise the public of the current situation and warn them about the impending dangers. However, now after seeing, reading and hearing the responses of the economic authorities, I believe that the greater danger stems from the attitude of the present economic authorities who appear to be truly comfortable with the current depreciating trend of the Rupee. In such a background, other stakeholders of the economy may be forgiven if they fear that the authorities are implementing a deliberate policy of rapidly depreciating the Sri Lankan currency, which may drive them towards panic-driven actions, which will further adversely effect the now-fragile economy.

Finally, I wish to state that it is obvious that the Central Bank’s statement of 25th April 2018 was referring to my comment made the previous day. Nevertheless, the Central Bank had (hopefully, inadvertently) attributed certain comments, as having been made in my brief statement, as follows:

“A news item that appeared in a national newspaper has emphasized that the depreciation of the Sri Lankan rupee against the US dollar has led to an increase in the outstanding external debt stock of the country, incurring a cost to the country in terms of local currency which could otherwise be used in investment projects.”

“Even though the value of the rupee in terms of the foreign currency changes, the foreign currency equivalent of loans and the interest to be repaid would not change. Therefore, the argument that ‘the external debt burden of the government has increased significantly due to the depreciation of the rupee’ is a misinterpretation of facts.”

“The statement that ‘if such a depreciation of the rupee did not arise, the government could have saved billions of rupees and this money could have been used for other mega development projects’ is also not correct.”

A simple reading of my comment, which I have set out above, would confirm that it did not contain the aforesaid statements attributed (indirectly) to me.

( The writer is former Governor, Central Bank of Sri Lanka )