Editorial

Annual Budgets are no longer awaited with bated breath like some decades ago because price revisions, always upward through dreaded midnight Gazettes, mid-term, have devalued the significance of Budgets for the ordinary citizen. However, Budgets outline an incumbent Government’s fiscal direction and many expect Tuesday’s Budget to be a populist one given the fact that it is election year. Every Finance Minister would love Budgets to be popular ones, but the nagging problem is; where is the money coming from to pay the bills. And arguably, the biggest headache for the Finance Minister and the Government is how to finance a populist Budget when the country is caught in a “debt trap”.

Both, the Government and the Central Bank are in self-congratulatory mood these days. We are reminded that in the first quarter of 2019, the repayment of sovereign bonds worth US$1 billion and re-engaging of the IMF to keep its facility on track for investor confidence purposes will permit additional borrowing in the international market following the 52-day Constitutional debacle late last year.

Sovereign bonds and term loans are, in fact, commercial loans. These have to be repaid in 10 years or less, usually with high interest rates ranging from more than 6% for 10-year bonds, and about 5% for 5-year bonds and term loans. At the end of last year (2018), the outstanding Government borrowings of commercial loans was about US$15 billion, implying average repayment of well over US$1 billion per year in the coming decade.

Unless there is sustained increase in export earnings or Foreign Direct Investment (FDI), or a radical change in Government policy, Sri Lanka is likely to sink deeper into a debt trap – a classic case of rolling over of existing commercial loans by borrowing in the international market every year for the coming decade.

The top-most wizards (or charlatans) at the Ministry of Finance and Central Bank cooked up three novel ways of commercial loan financing of the Government Budget from 2007. These are first, by raising funds from international market via sovereign bonds; second, by opening up the domestic bond market to volatile money flows from foreign investors; and third, by urging the National Savings Bank (NSB) and Bank of Ceylon (BOC) to borrow foreign money ostensibly for lending to the private sector. But the bulk of these funds were invested in domestic treasury bills/bonds thus indirectly financing the Budget.

The senior bureaucrats’ rationale for this type of commercial borrowing was that traditional domestic market borrowing cannot be increased much more without increasing interest rates and that project funding by multilateral agencies and foreign Governments are bound by their rules and regulations. Flexibility in funding the Budget and augmenting foreign reserves to meet any shortfall in balance of payment are the other goals. The implicit assumption was that the economy will grow fast enough to meet future debt obligations arising from high-cost commercial borrowing.  Commercial loans in excess of US$10 billion were raised during the 2007 to 2014 period. This became the dominant form of Budget funding in most years during that period. More than three-quarter of the Budget is usually allocated for recurrent expenditure. Money is fungible: flexibility in funding was really a ploy to use scarce foreign money largely on current consumption – unproductive spending of the worst kind.

Although Sri Lanka had a temporary economic boom during the early years of the previous Mahinda Rajapaksa Government, the country’s reliance on commercial loans for unproductive expenditure could not deliver sustained growth. The economy almost “went bust” in 2013. A huge commercial debt hangover of about US$10 billion was left to the incoming Administration to sort out.  The current Government has rightly emphasised the role of exports and FDI to put the economy on a sound footing and reduce the impact of the debt crisis.  But its piecemeal approach to promoting exports and FDI has not helped the economy to recover. The President, rooted in ‘agrarian home economics’, has hindered or thwarted attempts to bring in large-scale FDI and thoroughly confused investors on the Government’s policy direction. Much dependence continues on earnings from tourism and our toiling workers in West Asia.

Recently the Central Bank took a step in the right direction in stemming ‘hot money’ flows into the bond market by somewhat rectifying the worst aspect of commercial loan borrowing.  Foreign investors are now allowed to hold 5% of the volume outstanding in the bond market. More than US$1.3 billion and nearly US$1 billion in outflows from the bond market in late 2015/early 2016 and late 2018, respectively, contributed significantly to huge currency depreciations in those years. The prospect of a future run on the balance of payment destabilising the economy and the currency cannot be ruled out even with the 5% ceiling.

However, the current administration while continuing to lambast the Rajapaksa regime on the huge debt crisis on every platform has pursued the same policy of raising foreign commercial loans willy-nilly. The portfolio of commercial loans increased from US$10 billion in 2014 to about US$15 billion by the end of 2018. It has remained a major form of Budget funding from 2015 to 2018. As it now stands, the repayment schedule from 2024 to 2028 will be a minimum of US$1,500 million per year, an onerous burden for any prospective Government. By pursuing myopic short-term goals, both the current and previous Governments have mortgaged Sri Lanka to international lenders to the hilt.

The noise emanating from the Central Bank recently is also not encouraging. It appears the CB will be seeking new commercial loans from a range of sources including sovereign bonds, negotiating lines of credit through State Banks, and calling for Panda and Samurai bonds! The corrosive ‘sugar-high’ urge to go for high interest commercial borrowings closely mirrors the failed strategy of the previous Government, pushing the country further into the debt abyss.

What is of grave concern is that addiction to funding wasteful expenditure on current consumption or on unviable projects with costly commercial loans is likely to increase in the forthcoming election cycle. The dual nature of the current cohabitation Government is not helping. The President, seeking a second term, is instructing the Ministry of Finance to dole out money at every turn while the UNP is following its own policy of handing out goodies. The overhang of enlarged commercial debt does not augur well for the future. Already glaring examples of ‘boondoggles’, the vanity projects of the Rajapaksa Government are bad enough. The bigger danger is servicing the footloose commercial loans, not so much the project loans. The Government in power at some point of time will have to exhort the people to make hefty sacrifices in the name of development. The bottom 60% of income earners who have been remarkably tolerant despite their incomes stagnating or barely increasing over the past few years will, no doubt, be the ones who have to pay a higher price.