Dollar crisis of the country: What aggravated this situation?
Inside a money exchange shop.
The total foreign currency reserves of the country had been around US$7 billion at the beginning of 2021 but had depleted to around $1.2 billion towards the year end, even though the Central Bank announced $3 billion in reserves.
The net foreign assets of the total banking system is said to be a deficit of $4.1 billion close to end 2021. Everybody knows the suffering and difficulties people undergo as a result of the depletion of foreign currency or dollar reserves. Without talking and elaborating on those effects, it is my intention to examine how foreign reserves vaporised so fast.
The coronavirus pandemic affected every country globally but countries in this region did not suffer and face such crises like this country, so that it cannot be taken as an excuse. It is not essential to elaborate on this as it is common knowledge.
Debt burden since independence
Even though there is the tendency to blame every government since independence for creating the debt crisis it is not so. Immediate recollection brings to mind the massive irrigation scheme, Gal Oya, implemented around 1948 using local funds. Then from 1950 the major port development scheme of Colombo Harbour creating the most modern Colombo Port by 1956 utilising local funds amounting to Rs. 110 million as recorded.
The Mahaweli Development Project which is a massive irrigation cum hydroelectric scheme originally planned for 30 years but contracted and accelerated to about six years by the J.R. .Jayewardene government used concessionary loans as well as grants. Funding had been after carefully completed feasibility studies and eminent engineer late Dr. A.N.S. Kulasinghe and his team of engineers working as consultants. The resultant benefits are well known and never seem to have created a debt crisis in the country.
Road and railway infrastructure development have been known to progress smoothly using local funds. After the 2004 tsunami disaster, staff of the Railway Department rehabilitated the destroyed line to recommence operations with least delays. It is said that the northern rail line improvements carried out later using some loan funds under Uthuru Wasanthaya had spent 2 to 3 times the existing prices and whom to blame is not known.
From 1980 the country saw another major development programme utilising Japanese Government concessionary loans in the port sector. Studies had been conducted at a time of increasing demand for container traffic confirming the urgent need to expand port facilities. The first phase of expansion requiring $32 million had come as a Yen currency loan. The project had progressed systematically with further loans adhering to a transparent bidding process. Recorded achievement had been the elevation of the Colombo port from the 127th global rank in 1981 to 21st in 1997. These loans were received only after proper feasibility studies and confirmation of loan repayment capability.
Not all borrowings are looked at but only those few that come into mind are examined to illustrate the misconception applicable to 70 years since independence. Extensive borrowings for project infrastructure appear after about the year 2000 and not over 70 years since independence which some claim.
Newer debt accumulation
A Sunday newspaper of March 9, 2014 and May 1, 2016 reported details from the External Resources Department listing 28 projects funded predominantly by China Exim Bank loans amounting to $7,671 million, with 5 year grace and 10 year repayment period whose interest rates were not indicated but supposed to be over 6 per cent.
All these projects were said to be through unsolicited tenders. The same newspaper reported, “Normal tender procedure not possible for mega projects: PBJ”. This is a questionable statement.
Further examination of above list showed seven projects all in Hambantota totalling $5,054 million, for airport, port, highway extension, railway extension, local road network etc. None of them seems to generate revenue to repay the massive loans even though they have been in operation for around 10 years by now. These few loans would have required about $1billion per year for repayment and burdening the country using up dollar reserves. During the previous regime Hambantota port had been given out on a 99 year lease, almost sold, to China and the resultant debt relief is not clear.
Did not the Treasury officials who handled these borrowings see the danger of the debt burden or debt trap and the inability to repay them without adequate future revenue? One may argue on varying global financial structure and unforeseen events. Such should have been included in any plans. High costs due to unsolicited offers without competitive bidding is also an issue. As for costs, the Treasury Secretary had said it is engineers who decide the costs and we know whom to blame. This is not an acceptable excuse.
To expose the above misconceptions the following illustration is presented: The Colombo Port South Harbour was found to be an urgent, essential, viable project proved after an extensive feasibility study by 2001. After detailed designs, cost estimates and all requisite implementation documents, it was not possible to proceed due to lack of funds. The Hambantota Port project was also given high priority by the political authorities at the same time though two feasibility studies had not shown clear viability.
For the Colombo Port project, the Treasury Secretary advocated commercial borrowing stating that the lending agency conditions were unacceptable. In fact only one lending agency had come forward offering about one third fund requirement. Persuasion and convincing the lending agency by the Ports Authority had made it possible to receive a very concessionary loan of $300 million in 2006 to proceed but with a 2-year delay on the project. The new harbour was completed very successfully within the stipulated duration and cost while adhering to a transparent tender process. It’s worth stating that the lowest accepted price was around $320 million from a successful Korean contractor who completed it while the next bid was around $570 million from a Chinese contractor. This project seems to be generating more revenue than budgeted during past years of business.
Most Chinese funded projects that originated during the past two decades seem now completed and in operation, spread among power and energy, roads and transportation, airport and aviation, port, irrigation and water sectors. Debt distribution is given as $1,553 million in power and energy, $3.99 billion in roads and transportation, $232 million in airport and aviation, $1,336 million in ports and $101 million in irrigation.
An expensive venture like the Norochcholai coal power plant costing $1,346 million has helped in meeting the country’s power demands and there has to be a post evaluation to understand its financial gains to the country and loan repayment aspects. Highway projects undertaken using expensive loans do not seem to generate high revenue to meet dollar loan repayments. Though travel time is curtailed to half or one third the normal time and travellers are happy, their post economic evaluation and financial evaluation are not seen.
Considering average annual turnover and taking out operation and maintenance costs it could take 100 years to repay loans though its life span is much shorter. Authorities should perform a post evaluation for the benefit of future planners.
Lessons for the future
This is history but should not be discarded as the valuable information and data contained therein demonstrate the actual scenario and resultant repercussions. Decision-makers and advising economists in the government especially of the Treasury and any other relevant officials could review them.
The loan burden creating the dollar crisis has aggravated during the past two decades. The corona epidemic during past two years is not an excuse as other countries in the region too faced the same but are performing better. Negative economic growth in 2020 and huge dollar debt burden with the country’s reserves collapsing have not been a happy scenario and not a sudden occurrence.
While Sri Lanka’s economy is going from bad to worse with the US dollar crisis and import restrictions tightening up severely, the country is yet to witness days that are unimaginable; this is what the Secretary to the President said delivering a speech in Colombo as reported in a Sunday newspaper on November 28, 2021.
He was the Treasury Secretary during the past two decades most of the time in which China Exim Bank loans were signed running into billions of dollars mostly on white elephant projects, and thus what more can be imagined. The economy cannot be a day-to-day juggle to balance interests. Incidentally the collapse of tourism is related to the corona pandemic but not foreign remittances dropping. The massive dollar debt seems to be the root cause of most problems faced today.
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