Burgeoning debt trap exacerbated by ‘Dragon-debt trap’
President Maithripala Sirisena, during an awards ceremony at the Sri Jayawardhanapura University on August 8 invited all educated and knowledgeable citizens come forward and contribute solutions to nationally significant problems without allowing politicians to do everything.
It is commendable that the president has noticed the silence of the educated class in this country, and taking on the offer, this article reflects on the economic issues faced by the country. It’s very clear that Sri Lanka is currently in the debt-trap and the Finance Minister is working hard to resolve the liquidity-puzzle. The Colombo Port City Project (CPCP) is another ambitious and large-scale “Dragon” development project started by the Rajapaksa Government, without assessing its feasibility, socio-economic effects, overall costs and benefits, capacity of the government and even possible damage to the country and costs of losing regional security and peace.
CPCP which began in September 2014 was a hot issue on political platforms at the last Presidential and Parliamentary election in 2015. The present government discontinued the CPCP due to various criticisms, adverse comments, unresolved environmental issues, possible misappropriations, procurement issues and due to various types of opposition in March 2015. Now the project is restarting under a brand new agreement signed on August 12, unfortunately without allowing public discussion and also presenting it to Parliament. One can only assume that the government has looked after the interests of Sri Lanka, cost and benefits, and territorial security and internal sovereignty issues. Even then, it is doubtful whether it’s economically possible to implement a project which is nearly 100 times bigger than the Hambantota Port when considering the present financial condition of the government; the existing ‘debt trap together with existing socio-economic,-financial and political problems of the Sri Lankan economy.
According to rough estimates, the CPCP completion cost is around US$ 30 to 40 billion including an 8-year cost escalations. Total cost includes land filling-reclaiming around US$3 to 5 billion which is said to be free for Sri Lanka. In addition, as Chinese authorities once stated, the cost of structures is $13 billion or more for developing the Chinese land. The estimated cost for developing Sri Lanka-owned land development would be US$15 to 20 billion, for which Sri Lanka has to find funds. Being the second largest economy in the world, China is able to provide better facilities and structures than Sri Lanka can afford, and thus would be able to attract the foreign investor to the Chinese side. It is impossible for Sri Lanka, even to provide basic facilities: such as roads, water, electricity, telecommunication, gas, waste disposal, etc because the basic infrastructure alone costs at least $8 to 10 billion without structures. Sri Lanka has to borrow from the open market at high cost. Is that possible? In addition, how would Sri Lanka bear the cost of maintenance and real estate management cost, at a time when Sri Lanka is on the door-step of a public debt – driven economic crisis and an already caught-up by ‘debt-trap’ situation?
State of SL’s current economy
The size of the Sri Lankan economy is around $85 billion in 2015 in terms of GDP while the volume of public debt has reached $82 billion, close to almost 100 per cent of GDP. Out of the total debt, foreign debt burden is around $60 billion including state institutions and going to absorb almost all the export earnings for annual debt repayments or same as the total government revenue in 2015. During the last regime, borrowings from the open capital markets were at exorbitant rates of interest with shorter repayment periods resulted in “debt-trap” situation.
Although the opposition criticizes the government for heavy foreign borrowing in 2015 and even in 2016, it is understood that the government is repaying short term debts taken by the previous government-utilised lavishly for “White-Elephant type projects”. The present government has to find resources; borrow high-cost debts for repaying previous debts. Debt repaying liability with the current borrowing is expected to double or triple in 2017. It is worthwhile to examine whether the government has the capacity to bear further huge debt liability in the near future.
TABLE
Ultimately all the macro-economic indicators deteriorated significantly, with a huge fiscal deficit and external debt burden, trade deficit, Balance of Payments deficit, deteriorating external reserves, exchange rate depreciation and almost facing incoming recessionary situation as summarised in the table. Some of the serious adverse economic concerns and the capacity of the economy are as follows:
- Huge fiscal deficit: Anticipated fiscal deficit is almost 100 per cent than the revenue in 2016 and there is no hope that the revenue could be increased even in 2016 due to objection for VAT increase. Government fiscal deficit is forecasted to be further increase in 2017 and 2018 including the losses in state ventures.
- Debt-driven foreign borrowing: It appears that the country is almost caught in a serious debt trap which may develop into an economic crisis in the near future. Presently, total debt ratio equals GDP and a further increase is expected under the ongoing circumstances.
- Adverse trade deficit: Poor export production irrespective of import bill reduction and increasing fish export to Europe in 2015 and in 2016. There are no signals to show an improvement of agricultural exports which are estimated to fall by 7.5 per cent in 2016. A similar drop in the industrial export sector and the services sector is also forecast. In the meantime, the import bill is seen rising due to a possible price hike in fuel and exchange rate depreciation in 2017.
- Incoming BoP crisis: The trade deficit-driven BoP crisis situation may arise in 2016 irrespective of inflow of foreign-employee-remittances and income from services. Additionally maturing debt repayments may worsen BoP gap in 2016 and 2017.
- Adverse international conditions in 2016 and 2017: International socio-economic conditions will affect the small trade dependent market economy in Sri Lanka. Developing political disturbances and financial difficulties in Middle-East, Russian block of countries may affect export revenue and workers’ remittances.
- Completely neglected economic sectors: Political authorities are largely devoting their time to the power-struggle and don’t understand the ongoing “Dragon-scale” economic problems. They have almost neglected their ministerial portfolio-responsibilities. In the meantime ministerial-level senior managerial level officials and designated advisors are playing to the tune of the political authorities, safeguarding their personal perks. Opposition political groups are criticising everything and not willing to accept that they are partners (or even the cause) of the present economic situation in the country and should unite to save the country.
- Neglected fiscal consolidation and populist policies: It appears that the most needed fiscal consolidation hasn’t happened to mitigate the enhancing fiscal consolidation.
Reclaiming land by strong economies experience
Evidence shows that the countries that reclaimed lands had their own investment funds, carefully evaluated assessments and proven cost-benefit evaluations. Many such projects are with benefits and outcomes to their economy. However, there are failures of “ghost-cities”. Some of the win-win cases are: Singapore Changi Airport and Marine Bay site; Jerome Island for petroleum refinery business; Santos Island Leisure Park; Japan Tokyo Bay; China: new city of Shanghai; Hong Kong Airport and Disneyland; Netherlands: Maasviakte Rotterdam Port and Denmark: Amager Starind Copenhagen beach reclamation project.
Sri Lanka however has no investment funds, financial capacity, economic feasibility and proven benefits and outcomes or any of those justifications for a new “International Financial City” on reclaimed land in the Indian Ocean. A similar International financial City could be built anywhere in the country at least cost and higher benefits than CPCP.
New Colombo Port City agreement
China has claimed $175 million as damages which is similar to what a commercial bank does to its’ defaulters. It is partly threatening an empty-pocketed Sri Lankan government without any legal justification. At the end, the damage claim has been converted into a portion of reclaimed land ownership. We are reminded of the proverb that “there is no free lunch” or no deliberate help to Sri Lanka; it is purely a business deal. Ultimately Sri Lanka has got caught by a deadly-trap. CPCP is a dead-rope given by the last regime, swallowed barely by the authorities in spite of many other unresolved economic problems. It is pity that the government has been pushed to a situation where it cannot say no to the CPCP. It is a sort of a “Dragon-Trap” in addition to the existing debt-trap.
Some of the changes in the new CPCP agreement, we learn, are:
- Reclaimed land will be allocated to China on 99 year lease basis;
- A new trilateral agreement will be signed between the Ministry of Megapolis and Western Development, UDA and the project company;
- Agreed to follow strict environmental restrictions;
- Reclaimed land will be managed by a newly proposed Financial City Corporation (FCC);
- Utilities and transport facilities: The project company will evaluate a long-term solution to ease the government’s responsibility of undertaking provisions for road infrastructure and utility services for the site. Most probably the cost will be on a partnership basis;
- Management and maintenance of the reclaimed area by a “Estate Management Company” in partnership with the government;
- Limits impose on developing state land has been modified’
- Changes to status: Government will be allowed to build a financial city;
- Changes to reclaiming extent: 269 hectares instead of 233 hectares in 2014. China will own 110 hectares while government will own 159 hectares.
Estimated reclamation cost and ownership cost:
It is the general perception that there is no cost to Sri Lanka as the project is entirely carried out by China. This is far from the truth. According to new estimates for 269 hectares, the price escalation of reclamation will cost around $3 to 5 billion with a 6-to-8 year construction period. The cost of Chinese ownership may be around $1.226 billion and $1.773 billion cost to the government. Under current prices, bare land cost of a hectare is $11.2 million (Rs. 1,672 million). Present land cost of Colombo prime land may be around Rs. 40 to 60 million. According to information, China will invest $13 to 15 billion to develop their land while it may cost around $18 to 20 billion or roughly Rs.3,200 billion to the state to develop its own land. Even for basic facilities the government has to spend $8 billion or Rs.1,280 billion and without such basic facilities, there is no commercial value. Another issue is that if the Chinese side offers better facilities than Sri Lanka can afford, foreign investors will be enticed by the Chinese offers.
Besides China can accommodate its own investors while Sri Lanka has to look for international investors. Moreover, Sri Lanka has to borrow internationally at a higher cost, as per rough estimates an extra $10 billion for three years for the project operation in addition to $7 to 10 billion to serve the current foreign debts. Then the estimated foreign debt of $57 billion at the end of 2016 may increase to around $70 billion, $90 billion and $115 billion during 2017 to 2019 in spite of no return from many of the projects including CPCP. It is not at all realistic to expect the small Sri Lankan economy to tackle this huge debt. Under the present economic state of conditions, this would be a daylight–dream, a disastrous move pushing the country to the fire from the firingpan.
Possible additional country-compensations claims
It is said that the project company will allocate Rs. 500 million or almost $3 million for fishermen’s income support. This amount will not be sufficient at all and the government would have to look after the other compensation claims estimated to be Rs. 15 to 20 billion for granite, clay, gravel sand sites affected crowed, road transport, pollution and for other affected people. In the meantime, opposition parties may aggravate the situation with public protests which in time could develop into demands for a regime change or other disasters.
Employment and income generation potential
The CPCP construction work which will take 5 to 8 years will be carried out by over 2,000 direct local and foreign employees and at least 10,000 indirect employees. The cost of local project procurement supplies is around $900 million during the construction period. According to the estimates, once it is completed, the project expects to generate around 100,000 jobs for locals but many of these high-tech and knowledge-based work are likely to be filled by foreigners in the absence of proper TVET education plans.
Suggestions to avert crisis
According to the summarised facts and evidence detailed above the government has to choose a proper economically, socially, politically, legally and internationally feasible and viable alternative with the least cost and damage to the country. Besides, Sri Lanka has no capacity to commit for such a “Dragon-scale investment project according to the economic conditions noted above. Although the MoU has been signed on 12th August, some of the suggested alternatives are:
1) Discontinue the CPCP and pay the compensation claim to China if it is included in the original agreement. Do not take the highlighted risks which will pave the way to an economically, socially and politically disastrous situation.
2) Postpone CPCP to a further period until burning economic problems are resolved.
3) If the government chooses to continue the CPCP project, then it must be ready to face the possible consequences both internally and externally.
Finally, politicians who have entered into short term political and social contracts with the people (through elections) have no right to pass the “Dud debt obligations” to the country’s future sons and daughters.
(The writer is a freelance
economic consultant.
He could be reached at
palithaeka@yahoo.com)