News
Trade deficit widens perilously as Chinese loans, vote-buying handouts take their toll
View(s):Faced with a perilous fiscal situation, debts and inability to fund populist grandiose pork barrel projects, Sri Lanka has laid the blame on China for its indebtedness, while making an embarrassing plea for help, yet again. Finance Minister Ravi Karunanayake acknowledged to a newspaper in Hong Kong the “pathetic finances’’ he is overseeing, and implored the communist friend to “come and help’’ to sort out the loans.
“Chinese loans are a big part of our problem. A bulk of the government expenditure goes into servicing them,” he told Hong Kong’s longest established English daily, the South China Morning Post, on Monday.“I urge China to put past acrimony behind us and help us by adjusting the terms of the loans to make them more viable. We are serious about putting our relationship on the right path and mending the pathetic finances we have inherited from a corrupt regime.”
China, however, has repeatedly rejected his accusations.
In the postwar period, Sri Lanka borrowed more than US$ 5 billion from China for projects including some that have become white elephants, although China’s State companies have beneficial financial stakes in them. Despite Karunanayake’s protests, Beijing has insisted that loans have been given “based on consensus through consultations’’. China has also said no one forced Sri Lanka to borrow.
In April, the Chinese Chamber of Commerce in Sri Lanka rejected Karunanayake’s claims of high interest loans.
The chamber said that, in the past 10 years, more than half the loans that Sri Lanka sought were provided at “interest rates of only 2%’’.
Interest rates of Chinese commercial loans were also much lower than in the international market, or at Sri Lankan commercial banks during the same period, the chamber argued. Referring to commercial loans, the Chinese business group said international financing costs increased in 2007, and Sri Lanka issued Treasury Bonds at interest rates ranging from 12% to 14%. During this time, Chinese banks gave Sri Lanka a large amount of preferential loans as well as some commercial loans at 6% interest, “which were quite favourable and reasonable at the time’’.
The chamber said: “We hope the Sri Lankan official concerned will make remarks based on facts, take the people’s wellbeing as first priority and make joint efforts with the Chinese side to maintain the good environment of China-Sri Lanka pragmatic cooperation.”
Reflecting the desperation in the latest plea from Karunanayake, TIME.com headlined a report, ‘Sri Lanka attempts to repair relations with China amid an escalating financial crisis’. Responding to claims about pricey loans, Beijing’s envoy in Sri Lanka, Yi Xianliang, noted on October 1, that China is “Sri Lanka’s friend in need’’. He added that, “China has provided preferential loans amounting to more than Rs 800 billion and donations worth over Rs 200 billion.’’
He also claimed that mega projects have created “100,000 job opportunities for the local people and trained tens of thousands of technicians and managers’’. He did not explain how the job creation data was arrived at.
Heavily-indebted Sri Lanka estimates Rs 3.13 trillion in expenditure for 2016, compared with an inadequate Rs 1.79 trillion in revenue. Colombo also estimates Rs 1.3 trillion in foreign and local borrowing.
Following a review that ended in late April, the IMF estimated Sri Lanka’s external debt at US$ 45 billion, rising to US$ 47.6 billion in 2016. Government data show that debt service payments (principal and interest) was slightly above US$ 1 billion in the first four months this year.
From January to April, recurrent expenditure increased to Rs 522.5 billion as a result of populist measures including salary increases and a monthly allowance of Rs 10,000. Salary increases alone cost Rs 181.4 billion. The IMF said the “fiscal deficit is a key concern for 2015 and the medium-term’’.
“The 2015 deficit target will likely be very difficult to reach even with relatively optimistic assumptions regarding revenue gains. Further, in the absence of new measures to create a more durable increase in tax collection, revenues in 2016 will drop as the one-off measures expire, while the permanent increase to recurrent spending from the revised 2015 Budget will likely push the deficit higher — raising the level of risk to debt sustainability.’’
The IMF also called on Sri Lanka “to adopt more ambitious measures to contain current expenditure, while protecting priority social and high value-added infrastructure spending.’’
It emphasised that a strengthening of the fiscal framework is needed to support consolidation and debt reduction.