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Sri Lanka's total debt recorded at end-May is Rs. 16 t
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Import restrictions, no solution to reducing foreign reserves
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Prices, inflation increased despite price controls
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SL's credit rating one notch higher than default rating
"We have to gradually implement that decision – not in an abrupt manner. The actual reason for the chemical fertiliser ban is to save $ 400 million in import costs of fertiliser; it’s not that they want to convert the agriculture sector in the country into using organic fertiliser. The Government is completely out of foreign exchange and that is the reason to ban chemical fertiliser" Dr. Harsha de Silva [/caption]
What is your opinion on the debt burden faced by the country along with the Covid-19 pandemic?
The debt has been building up for the last 50-60 years. The fundamental reason is we don’t save enough. We consume a lot. Both the Government and private individuals don’t save sufficiently. For capital formation, we need to make investments and we have to save enough. So, that deficit has to come from overseas.
The result is what we call a capital account and current account deficit. It is the difference between investment and saving; national investment and national saving. That is reflected in the capital account of the Balance of Payments.
If we spend more than what we save, there is always going to be a deficit, and that deficit adds up every year. When it adds up, that turns into debt because we have to borrow money to pay the deficit; and if we have a surplus next year, we can pay the loan, but then if we have a deficit the next year, the loan amount gets bigger. Likewise, over a long period, we have been borrowing to make ends meet. That is why debt has been growing. That debt is in two distinct formats, i.e. rupee and dollar-denominated debts.
As of the end of May 2021, Sri Lanka’s total debt was recorded as Rs. 16 trillion. This means for the last 20 months, debt has gone up by Rs. 3 trillion. Compare that with the previous Government; during the last five years we were in office (2015-2019), the debt was increased by Rs. 5.6 trillion. But, in the present Government’s tenure, from January 2020 to June 2021, it has gone up by Rs. 3 trillion. The debt accumulation, in fact, increased massively. This is the current status of the debt, and it is now much bigger than the Gross Domestic Product (GDP) of the country.
When it comes to foreign debt, those days, we used to borrow dollar-denominated loans which ran maybe 30-40 years and we’d make a small payment, and the interest was about 0.2%. However, from 2007, the strategy was changed and we started issuing international sovereign bonds. Those have a bullet payment system, which means, instead of paying a small amount over 30-40 years, you don’t pay anything at all for the duration of the bond. When it is due, you have to pay the whole thing at once and the interest rate is 6-8%. What has happened is, not only has the foreign loan amount increased but the interest rates have also increased.
How would you tackle the dwindling foreign reserves? Is strict import regulation a viable option?
No, it is not a viable option because most of our imports are intermediate goods. For instance, out of our $ 20 billion import bill, about $ 4 billion is for petroleum, and we bring all kinds of other raw material and intermediate goods. Also, we import goods worth $ 2 billion for the apparel sector to make exports worth $ 5 billion. Even the food imports have increased. A lot of the things they (Government) originally restricted are now being allowed to come in, since without those goods production capacity is falling. The limitation of imports creates black market operations.
Also, the Government had, through the Central Bank, allowed licensed commercial banks to determine (peg) the US dollar (USD) to Lankan rupee (LKR) rate which was initially Rs. 199-200 (bank buying and bank selling rates, respectively). However, that won’t work, as there is a big demand for dollars. People are going to parallel markets to buy dollars, and that is also because these import controls are not working.
Import restrictions, for a country like Sri Lanka, which is a trading country, is not a viable option. It only adds tax on exports. The more you control imports, the less competitive the exporters become. Import controls are not the answer. All we have to do is increase our exports. We have to look at not restricting what we spend overseas but encouraging earnings from overseas as much as we can.
What is your view on the rising cost of living and how can we best tackle it?
Cost of living actually has two components to it: One is your income and the other is the cost of goods and services. Now, income has fallen because of Covid-19 and the current financial situation in the country. Some people have lost their jobs, while others are getting a half salary, and those who are self-employed can’t go out for work. Manufacturing production has come down; tourism is dead. But the cost of goods and services is increasing. If we look at the national inflation figure, it has risen even with controlled prices. However, people could not buy anything at the controlled prices. The current food inflation is also 11%, which is very high.
The country’s credit rating has been downgraded further and the Government is claiming that this began during the former Government’s time. What is your opinion on this?
The credit rating fell during the constitutional coup that occurred in the country during the previous Government’s tenure. One can say that was during the former Government, but the constitutional coup led to the crisis in governance and the economic situation in the country, which had led to the downgrade in the credit rating.
It has fallen much more during the present situation and it is one notch above the default rating. It signals that the ability of a country to repay its sovereign debts is getting questioned. When we have a very low credit rating, it becomes very difficult to go out to the international market and borrow money.
Now, we cannot go to the international market to borrow. International sovereign bonds are tradable securities. In this situation, it will be highly costly for the Government of Sri Lanka to go to the international markets and borrow money in dollars. The country is downgraded for many reasons, and the two main reasons are the size of the deficit in the budget and the inability to repay the existing foreign loans.
Some members of the Government have been quoted as saying the country doesn't need the GSP+ scheme. What is your view on this?
You need to have to look at the data and evidence before saying such things. The evidence clearly suggests that the GSP+ (Generalised Scheme of Preferences Plus) scheme has been very helpful for our exporters. It gives them a 16-17% advantage in terms of cost. Otherwise, they have to pay the applicable duty before getting the goods to the European Union (EU). There are 7,200 export items that get a complete duty reduction. So removing something that has been helpful will definitely lead to negative impacts.
State-owned enterprises (SOEs) are also making losses for a prolonged period. Do you think it is due to the absence of a proper pricing policy?
If we increase prices, these SOEs won’t make losses. When the Government controls the price while the costs of these items/services by the SOEs are higher than the government-set price, obviously the SOEs are going to make a loss. If we take the Ceylon Petroleum Corporation (CPC), is the government tax causing the CPC to make a loss? It depends on the amount of tax imposed by the State and the price that they are determining on an administrative basis. The prices of these services have been fixed; it is not a market price. The prices of electricity, transport, and petroleum are fixed. It is really unfair to say that these institutions are making losses because the Government is extracting money from these SOEs to the Treasury as taxes.
What is your view on the Government’s move to ban chemical fertiliser?
This is not a prudent decision to make. We have to gradually implement that decision – not in an abrupt manner. The actual reason for the chemical fertiliser ban is to save $ 400 million in import costs of fertiliser; it’s not that they want to convert the agriculture sector in the country into using organic fertiliser. The Government is completely out of foreign exchange and that is the reason to ban chemical fertiliser.
Denying the claims on excessive money printing, the Government is saying that they had printed money to settle the provisional advance taken by the annual budget. What’s your view on this?
It is true, they did that. They printed a whole lot of money within one day and then they retired the next day. That is technically correct, but without understanding the depth of the issue, the Government is saying a lot of things, including technical details that many don’t understand.
In March 2020, the Central Bank had a stock of Rs. 75 billion in treasury bills which they were holding and now, it has gone up to Rs. 900 billion. On one hand, net domestic assets, by way of treasury bills being held by the Central Bank, have increased, but on the other hand, net foreign assets, i.e. reserves, sold by the Central Bank have reduced.
The Government is printing a lot of money as a way to remedy the local debt with the treasury bills and bonds, etc. Meaning, the Treasury is taking loans from the Central Bank. When it comes to locally denominated debt, the Government believes their strategies will work, and so they let the debt grow while printing as much as they want.
What are your views on the Government’s programme to import vaccines? Do you think it has to be further developed?
The Government made major blunders in their vaccine procurement and they have to take the blame for this wave. The National Medicines Regulatory Authority (NMRA) approved the Oxford-AstraZeneca vaccine on 22 January and instead of immediately purchasing that, the Government delayed it by one month. The Cabinet only approved it on 27 February. That one month was critical. It is a complete failure of the Government. These people believed in tonics and other various things without ordering the vaccines in timely manner. Now, they have messed up the whole process.
The administering of whatever has been procured too is in such a mess. Instead of using our primary healthcare system, the Army is having vaccination centres and people have to wait for a long time to get the vaccine. That is not the way it should be done.
In terms of cost, we bought 10 million doses of the Oxford-AstraZeneca at $ 5.25, we ordered five million doses of the Pfizer vaccine at $ 6.75, we ordered another 10 million doses of Sputnik V at $ 9.95, and we ordered 14 million doses of Sinopharm at $ 15. That is 50% more than what Bangladesh and Nepal paid. These are questions that have to be answered. The Government is being completely non-transparent when it comes to the cost of vaccines and they wasted so much money.
What do you think about the Sinovac Memorandum of Understanding and how the price is being kept secret?
Sinovac has not got the NMRA approval and the Government is saying they cannot reveal the price. All I have to say is that the Government has failed in this process.