Trapped in debt
View(s):It’s abundantly clear that the recent visit by the United States Secretary of State Mike Pompeo was to drive a wedge in the ‘cordial’ relations between Sri Lanka and China. That the US is getting jittery over Sri Lanka’s strong ties with China, in recent years, was clearly seen in Pompeo’s anti-China comments during his meetings with Sri Lankan leaders including President Gotabaya Rajapaksa.
The President’s view that Sri Lanka is a country that has many friends and no enemies and doesn’t tilt in favour of any single nation apart from the fact that Sri Lanka is close to India, being its immediate neighbour across the Palk Strait, wasn’t what the Americans wanted to hear. They were here to convince Sri Lankan leaders that the US has better trading relations with Colombo whereas the island nation’s ties with China are mostly through a growing cycle of debt due to many Chinese loans.
As I pondered over these thoughts, watching the trio – Kussi Amma Sera, Mabel Rasthiyadu and Serapina – through the window, conversing under the margosa tree this Thursday morning, the phone rang. It was Arthika, my economist friend sometimes known as Somey.
“Hello, machan, I was wondering what your thoughts are on the recent visit of the US Secretary of State. What was the reason for the visit?” he asked. “Well… I think it was to try and convince Sri Lankan leaders that their shift towards China is not a good one,” I said.
“Whichever way we go, the biggest problem we have is the debt trap we have walked into. For the next few years, we’ll be borrowing to pay off loans as the debt piles up, year after year. Tax revenue is hardly enough to meet interest payments and state expenditure,” he said, instantly drawing my attention as this was a good topic to write about.
“Where do you think lies the answer to this debt crisis?” I asked.
“Well the only way that we can pay off debt and not keep it for generations to pay, is to increase our revenue and reach a stage where loans are paid off from revenue rather than borrowings. However, when we would reach that stage is anybody’s guess,” he said, adding, “whether we like it or not we have forsaken our future and that of the younger generation to a cycle of debt from China”.
We discussed many other matters before winding up the conversation.
State Minister Nivard Cabraal, fast becoming the government’s to-go spokesperson on the economy, has said that Sri Lanka is able to settle its foreign debt comfortably and has never defaulted. Whether the government has a plan to settle debts in the next five years of the current regime remains to be seen.
For the record, Sri Lanka’s total foreign debt is approximately US$55 billion, which accounts for nearly 80 per cent of its GDP, according to the latest official figures.
Of that, China and the ADB each represent about 14 per cent of the loans taken by Sri Lanka; Japan 12 per cent, the World Bank 11 per cent, while India holds about 2 per cent. The balance is made of debt due to other countries in smaller proportions and commercial loans.
As the geopolitical struggle over Sri Lanka boils down to a three-way fight for territory – India, China and the US – the fact of the matter is that whatever the US’s political designs on Sri Lanka, its trade with Sri Lanka is currently in Sri Lanka’s favour, unlike China which is weighted down with loans to Sri Lanka.
In 2019, Sri Lanka exported goods to the US worth nearly $3 billion of which $2.4 billion came from garments. On the import side, Sri Lanka imported goods worth just $390 million with trade heavily in Sri Lanka’s favour. US investments in Sri Lanka have also shown a decent rise in the past decade.
Not so in the case of China, with figures showing imports from there amounted to billions of dollars, while Sri Lanka’s exports to China are a very small fraction resulting in a trade balance heavily in China’s favour.
According to official figures, in 2000, Chinese imports represented just 3.5 per cent of Sri Lanka’s total imports but by 2018 that had risen to 20 per cent. It was also higher than India which rose to 25 per cent of Sri Lanka’s total imports in 2007 but fell to 18 per cent in 2018. Then add the growing number of Chinese loans and Sri Lanka is firmly under China’s radar.
As I reflected on these figures, I was distracted by a noisy argument among the trio. “Api naya gannawa, naya gannawa wenath ratawal walin. Kohomada api meva apahu gevanne (We are taking loans and loans from other countries. How are we to pay them back),” asked Kussi Amma Sera.
“Samahara welawata mama hithanawa, ape sahodara sahodariyo meda peradiga weda karala ekkahu karana salli kiyala, me naya gevanna pavichchi karanne (Sometimes I think the money earned by our brothers and sisters in West Asia is used to settle these loans),” countered Serapina.
“Eh pita-rata wala weda karana aya nethnam, ape aanduwa loku amaruwaka wetila. Eka hinda eh kattiyawa araksha karanna ona (If not for our workers overseas, our government will be in serious trouble. For this reason, they should protect our workers),” added Mabel Rasthiyadu.
Good point, but the trio was slightly off target because the loans are normally settled by borrowing other loans, foreign and domestic, and this cycle of debt goes on and on, with no end in sight. The debt has been piling up with governments – irrespective of whether in shades of blue or green – borrowing for infrastructure development and other work. The bunching of debt payments in the next five years means Sri Lanka has to borrow billions of dollars to settle this debt. With Sri Lanka’s credit rating coming down due to rising debt and a lack-of-confidence issue, the borrowings have also come at high interest rates.
Without getting into an argument over who borrowed more (the SLFP regime or the UNP regime), there is a need to work out a plan to repay this debt while at the same time increasing foreign direct investment and increasing tax revenue. The government also needs to reopen discussions with the International Monetary Fund for assistance.
As I completed my column and thanked Kussi Amma Sera for bringing in a second mug of tea, I watched her walk out of the room, realizing that it’s these simple folk and their future generations who would bear the brunt of the debt burden as taxes increase and revenue is sought to pay off the debt.