More loans could possibly leave Sri Lanka in the hands of China, warns top political economist
Following the recent visit of the Chinese delegation led by Yang Jiechi, a member of the Communist Party of China’s Politburo, Sri Lanka received a concessionary loan of US$500 million. Will this resolve Sri Lanka’s debt crisis?
China’s support was to enable Sri Lanka to pay off debt to other lenders. This is not a solution, but simply a way of deferring a solution, warned a top political economist Prof. Mick Moore, Founding CEO and Senior Fellow at the International Centre for Tax and Development.
Prof. Moore made these remarks to the Business Times in an email response while adding that this could leave Sri Lanka completely in the hands of China. “At any moment, China could decide not to extend further loans to Sri Lanka. That would precipitate a major economic and political crisis,” he noted.
Prof. Moore elaborated, the Sri Lankan government is deeply in debt. The most worrying is the very high ratio of debt to the government’s tax collections. This means that, when the government tries to refinance current commercial borrowings as they expire (something that it cannot avoid), the lenders will be concerned that, in the longer term, the government will not have enough revenue to pay off even the interest on its debts. So they will be wary of lending, and charge high interest rates as an insurance against Sri Lanka defaulting on its loans. And that will worsen the problem. There are, in principle three likely outcomes. Reality is likely to be a shifting mixture of all three, he stated.
One outcome is that the Sri Lankan government continues to re-finance its loans at higher interest rates, and at some point simply cannot pay even the interest. It will then default on its payments, leading to major disruptions in economic activity and trade, including a plunge in the value of the rupee. Living standards will be badly hit.
A second possible outcome is that the government will go to the International Monetary Fund (IMF) and ask for very large loans. The IMF will not agree without many conditions, including major and serious efforts to increase government revenues and cut public spending. Again, there will be a lot of economic pain and serious damage to national pride.
The third possible outcome is that China will agree to give very large, low cost loans (or grant) to the Government to enable it to pay its debt to other lenders. This is not a solution.
None of these outcomes will be palatable. It is too late to avoid all the pain, but the amount of long term economic and political pain could be much reduced if the government would begin to draw up a credible plan to increase tax revenue. Such a plan would help calm the fears of commercial lenders, increase the chances that the IMF would be willing to give assistance at some point in the future and strengthen the bargaining position of the government when negotiating further Chinese loans. By Raj Moorthy
Following the recent visit of the Chinese delegation led by Yang Jiechi, a member of the Communist Party of China’s Politburo, Sri Lanka received a concessionary loan of US$500 million. Will this resolve Sri Lanka’s debt crisis?
China’s support was to enable Sri Lanka to pay off debt to other lenders. This is not a solution, but simply a way of deferring a solution, warned a top political economist Prof. Mick Moore, Founding CEO and Senior Fellow at the International Centre for Tax and Development.
Prof. Moore made these remarks to the Business Times in an email response while adding that this could leave Sri Lanka completely in the hands of China. “At any moment, China could decide not to extend further loans to Sri Lanka. That would precipitate a major economic and political crisis,” he noted.
Prof. Moore elaborated, the Sri Lankan government is deeply in debt. The most worrying is the very high ratio of debt to the government’s tax collections. This means that, when the government tries to refinance current commercial borrowings as they expire (something that it cannot avoid), the lenders will be concerned that, in the longer term, the government will not have enough revenue to pay off even the interest on its debts. So they will be wary of lending, and charge high interest rates as an insurance against Sri Lanka defaulting on its loans. And that will worsen the problem. There are, in principle three likely outcomes. Reality is likely to be a shifting mixture of all three, he stated.
One outcome is that the Sri Lankan government continues to re-finance its loans at higher interest rates, and at some point simply cannot pay even the interest. It will then default on its payments, leading to major disruptions in economic activity and trade, including a plunge in the value of the rupee. Living standards will be badly hit.
A second possible outcome is that the government will go to the International Monetary Fund (IMF) and ask for very large loans. The IMF will not agree without many conditions, including major and serious efforts to increase government revenues and cut public spending. Again, there will be a lot of economic pain and serious damage to national pride.
The third possible outcome is that China will agree to give very large, low cost loans (or grant) to the Government to enable it to pay its debt to other lenders. This is not a solution.
None of these outcomes will be palatable. It is too late to avoid all the pain, but the amount of long term economic and political pain could be much reduced if the government would begin to draw up a credible plan to increase tax revenue. Such a plan would help calm the fears of commercial lenders, increase the chances that the IMF would be willing to give assistance at some point in the future and strengthen the bargaining position of the government when negotiating further Chinese loans.