SL’s debt like a pyramid scheme
Over the years, the government of Sri Lanka has gone deeper and deeper into debt, believing they will never have to settle these debts whilst at every election the politicians hoodwink the public by promoting the belief of economic prosperity, freedom, democracy and the rule of law.
Debt is a justifiable instrument if proceeds are invested in infrastructure projects such as roads, ports, airports, power, etc., which would stimulate economic growth and productivity which in turn improves taxes to service these debts. However, this is not how it turned out to be.
The government’s debt stood at a staggering 87 per cent of the country’s Gross Domestic Product (GDP) in 2019, an amount that is equally split amongst foreign and domestic lenders. This empire of debt has not been accumulated overnight; it has been built under the patronage of successive governments, each seeking to support their elusive visions, and most often egoistic wasteful initiatives. A common theme among politicians has been a lack of ownership for this situation and shameless finger pointing towards the opposition parties as a scapegoat.
Government representatives, having understood that vanity never goes out of style, have pretended that their projects are earning, or at least hoping to earn, either directly or indirectly through taxes. However, these debts are used for such projects and/or for day-to-day consumption (not to mention the mammoth corruption scandals) thus giving rise to an eternal monetary issue that has been burdening the entire nation for generations. This has been exacerbated especially now when the world economy is in tatters and poorer nations such as Sri Lanka are feeling the knock-on effect.
People believe that the political party that they bring to power will change the debt situation without realising the fundamentals of the economic engine–that is, the structure of government expenditure, investment and income need to change, not the political party in power because the government is addicted to a bad habit that’s hard to break: debt. This is nothing more than a pyramid scheme that will be passed on from generation to generation as it has been doing.
Why do foreign countries such as China lend money to countries such as Sri Lanka? They do so in the hope of getting money back with interest. How can Sri Lanka pay back these monies? Sri Lanka does not have any budget surpluses or considerable earnings to show for their borrowings. This mismanagement by successive governments has created a vicious circle that has buried the country in debt. Hence, it must borrow more to service the past debt, effectively a pyramid scheme.
For the last few years Sri Lanka’s money supply has grown faster than the GDP growth. Government liabilities have grown even faster and recorded a monumental depreciation of the rupee. Further, global rating agencies have downgraded Sri Lanka’s ability to service debt. One such rating agency has reported a US$3.2 billion payment in the latter half of this year. These facts should raise red flags all along as to what the economy could endure in the near future.
Even though politically unpopular, Sri Lanka must make sacrifices in key areas of public spending to service these debts. Though this seems to be the only option (compared to increasing taxes) and implementing national level policies to prioritise projects when loans are taken, it is almost certain that these critical measures will not be implemented due to political agendas being in the forefront and not the country’s long-term interest.
Unfortunate though it may be to the common citizen, given the toxic combination of financial and political weaknesses and no obvious economic platform on which to build a long-term recovery, optimism to overcome this heritance of an empire of debt is almost impossible.