Defaulting debt repayment can have severe repercussions
Sri Lanka has been running deficits over the decades following the post- independence period when the fiscal deficit was over 10 percent of the GDP.
In 2020 it exceeded 10 percent of the GDP and is likely to deteriorate in 2021. “If the government continues to consume more than it earns or when the domestic private savings are not sufficient to finance the economy it can reflect in our current account deficit. In the absence of domestic saving, the country has to depend on foreign savings to bridge the current deficit,” said Dr. Roshan Perera, Senior Research Fellow of the Advocata Institute at the launch of a publication on “Framework of Sri Lanka’s Economic Recovery at a webinar held this week.
She said in the absence of FDIs coming into the country Sri Lanka had to borrow from abroad. In the 2000 period funds came mostly from bilateral and multilateral sources and concessional financing. But these funds ceased when the country’s rating was elevated to a middle- income country status. When Sri Lanka embarked on infrastructure projects in later years, it had to borrow from private lending agencies and international sovereign bonds with shorter grace periods with higher interest rates. This had an impact on debt service payment which has ballooned over the years. With low foreign inflows coupled with the COVID-19 pandemic, debt servicing has been a challenge, she added.
As they are contractual obligations it can have serious repercussions in future when debt servicing is defaulted. Using foreign exchange to pay for debt servicing is not a good strategy. “To overcome this we have to address our macro- economic balances that need structural reforms. This is a primary area that we need to focus upon. Successive governments have not followed macro-economic policies. Apart from them we need growth to create jobs and competitiveness,” she said. Defaulting debt payment can have a negative impact on financing and credit ratings and the country as a whole.
Prof. Rohan Samarajiva Chairperson of LIRNE Asia said that due to the pandemic the informal sector is getting wiped out unable to make a living.
“Unlike in other countries we have not given them compensation for the damage caused to them by the lockdown. The second category is the small businesses that get affected due to not permitting them to move freely to engage in business. The government is going through a permit regime, however big companies are doing ok. The sector not affected are the 1.2 million government employees not coming to work for over a year while their salaries are untouched. The private sector employees too were affected with their salaries reduced,” he said.
Other state employees most needed should be further trained to be productive. However SLAS officers can be categorised as a barrier to reform, he said. Emeritus Prof. Suri Ratnapala of the University of Queensland, Advocata Academic Chair Dr. Sarath Rajapathirana and Emeritus Prof. Prema-chandra Athukorala from Australia also spoke.