During the past few weeks, a highly-expensive and politically-driven media campaign had been conducted by the Ministry of National Policy and Economic Affairs, using public funds, to convey the impression that the “debt trap”that the country has now fallen into, has been due to the mismanagement of the previous regime.
Through that campaign, they have also attempted to claimthat the present government has not done anything to cause that debacle, and that they have to now rectify the misdeeds of the past.
However, the truth is far from that assertion, as could be clearly observed fromthe Central Bank Annual Report for 2015, which was issued in late April 2015. That Report reveals the following position: During the initial period of the presidency of President Mahinda Rajapaksa, from 1st January 2006 to 31st December 2009 (4 years), the net public debt had increased from Rs. 2,222 billion to 4,161 billion; i.e., an average of Rs. 485 billion per year. Thereafter, from 1st January 2010 to 31st December 2014 (5 years), the net public debt had increased from Rs. 4,161 billion to Rs. 7,391 billion: i.e., an average of Rs. 646 billion per year. During the above periods, the Gross Domestic Product (GDP) of the country increased at a rapid pace, and the GDP that was just Rs. 2,453 billion in 2005, rose to Rs. 10,448 billion by 2014.
As a result, Sri Lanka’s Debt to GDP ratio, (which is the global yardstick to measure the indebtedness of a country),declined from a highly vulnerable 91% in 2005, to a more comfortable71% by 2014. At the same time, there was a visible and well-structured development programme, with the construction of new Airports, Ports, Power Plants, Irrigation Projects, Roads, Highways, Hospitals, Schools, and Government buildings. In fact, the road development work alone had been carried out at a cost of over Rs.750 billion with the entire road network in the country improving significantly. All these investments are tangible, and are dotted all over the country’s landscape today. In addition, the Rajapaksa government carried out thedetermined, but costly war against terror, while also maintaining and/or enhancing all public welfare programmes without a single welfare facility, such as the Samurdhi, fertilizer subsidy, MP’s decentralized projects, public-sector pensions, Divineguma village-level projects, or the numerous social welfare programmes like free school uniforms and books, being curtailed or stopped. In addition, a massive re-construction and rehabilitation programme was also carried out in the Northern and Eastern Provinces immediately after peace was restored in the country, at a cost of over US$ 3 billion.
In contrast, the current government has not been able to start or continue any new major infrastructural projects, or make any improvements to governmental services, during thepast 15 months. It has also curtailed almost all people-based welfare programmes, such as the fertilizer subsidy, free school books and uniforms, elders and disabled person’s benefits, and even deprived the MPs and other elected representatives of their decentralized allocations to carry out development work in their respective areas, on behalf of the people. Nevertheless, the government has broken all records of previous governments when it comes to borrowing. Since January 2015, the present government has borrowed heavily from every local and foreign source possible, and as per the Central Bank, the total outstanding government debt as at end 2015 had reached a staggering Rs.8,503 billion from Rs. 7,391 billion as at end 2014. Accordingly, this increase in debt by the present government in 2015 has been the highest-ever debt increase in the history of the country in a sum of Rs.1,112 billion, which is about one third of the net loans taken by the previous administration in the post-war period of 6 years!
The Central Bank Annual Report 2015, at page 13, states: “The total government debt to GDP ratio increased to 76.0 per cent at end 2015 from 70.7 per cent at end 2014, reflecting the weak performance of the fiscal sector and relatively low nominal GDP growth during the year. In nominal terms, total outstanding government debt increased to Rs. 8,503.2 billion at end 2015, from Rs.
7,390.9 billion at end 2014. The increased level of required borrowing, as a result of the below par revenue collection, and the significant depreciation of the rupee against major foreign currencies largely contributed to this substantial increase in government debt”.At the same time, the international rating agency, Moody’s as quoted in the Daily Mirror of 9th May 2016 stated. “Sri Lanka’s debt to GDP which was gradually falling from over 100% ten years ago hit a low of 71% in 2014, but rose to 76% a year after”.Moody’s added:“At 76% of GDP, government debt was high compared with similarly rated sovereigns”. Moody’s also forecast that the ratio would touch slightly below 80% by the end of 2016, while also cautioning that:“Despite the International Monetary Fund (IMF) funding set to ease immediate liquidity pressures, the continuing fiscal consolidation challenges would further increase Sri Lanka’s debt burdens and the debt to GDP ratio would continue its upward path during the next two years”.
The global rating agency also expressed its doubts over the government’s ability to bring about such fiscal reforms, as some of thosereforms “look a tall order to implement”.
As pointed out by Moody’s, the Government’s Debt to GDP ratio, which had a declining trend upto 2014, had an undesirable reversal in 2015, with the ratio jumping about 7.5% from 70.7% in 2014 to 76.0% in 2015, with the average for the five years being 70.6%.
2010 – 71.6
2011 – 71.1
2012 – 68.7
2013 – 70.8
2014 – 70.7
The above table shows that this ratio has deteriorated significantly during 2015under the Sirisena/Wickremesinghe regime, and is the highest in the past 5 years, indicating an unacceptably high degree of fiscal indiscipline, reckless monetary practices and downright economic mismanagement.
Contrary to the continuous allegations of the present government, the Central Bank Annual Report 2015 also reveals that the fiscal deficit, as a percentage of GDP in the years 2010 to 2014, under the Rajapaksa administration was on an improving trend as follows:
2010 - 7.0%
2011 - 6.2%
2012 - 5.6%
2013 - 5.4%
2014 - 5.7%
However, in the year 2015, the fiscal deficit zoomed by nearly 30% from that of the previous year, and 68% from the target to reach 7.4% of GDP, as the government resorted to indisciplinedspending and reckless borrowing. The Central Bank Annual Report 2015 politely records this situation at page 11 as follows: “The lower than expected collection of government revenue, high level of recurrent expenditure, particularly on salaries and wages, welfare expenditure, and higher than estimated outlay on interest payments, exerted a significant pressure on the overall budget deficit in 2015. Accordingly, the budget deficit increased from 5.7 per cent of GDP in 2014 to 7.4 per cent of GDP in 2015, significantly overshooting the government’s original target of 4.4 per
cent of GDP”. The Central Bank Annual Report 2015,at page 12,states as follows: “Interest expenditure also increased, in nominal terms, by 16.8 per cent to Rs. 509.7 billion in 2015, on account of higher borrowings and the depreciation of the rupee vis-a-vis other foreign currencies”.Further, the Report specifically states at page 193 that the public debt has increased in 2015 by a massive Rs. 285 billion, due to the depreciation of the Rupee. This loss of Rs. 285 billion that has been caused by the present administration is truly mind-boggling, since it is equivalent to the cost of two Norochcholai 900 Mw power plants, or two Colombo/Matara Highways! In fact, as would be noted from the Annual Report, the Sri Lankan Rupee uncontrollably nose-dived by a huge 9% in just one year,under the present regime, evenafter the Central Bank had dissipated about 40% of its Reserves as at 31st December 2014, or US$ 3,250 million,to artificially prop up the value of the Rupee. While the Central Bank’s defence of the Rupee was pathetically unsuccessful, this irresponsible and politically-motivated adventure of the Central Bank and the government which has now brought the external sector of Sri Lanka to seriously vulnerable levels,is yet another instance of the mega mismanagement of the economy by the present regime. It is ironical that this government is speaking of a “megapolis” when in actual fact, they are only indulging in mega-bond scams, mega mismanagement, mega rackets, and mega cover-ups.
At page 11 of the Report, the Central BankAnnual Report 2015 has directly stated that there has been a “higher than estimated outlay on interest payments”. In actual terms, such increase is mainly the interest paid on Treasury bills and bondsof Rs. 66.4 billion, which has been due to the interest rate increases as perpage 193 of the Report. That increase is equivalent to the cost of about two Colombo/Katunayake Expressways! However, the government and the Central Bank have chosen to conveniently ignore commentingabout this massive burden that has been inflicted upon the entire economyand the government finances. Instead, the government has attempted to conceal their own incompetence and mismanagement, by pointing fingersat the previous administration, as has been usually practiced by this inept administration.
It must also be noted that, in addition to the extra interest of Rs. 66.4 billion that was incurred during 2015 through the unwarranted increases in interest rates, expertshave also estimated that the additional interestcost that would be suffered by the government over the next 30 years, due to the mega-bond scam would be a staggering sum of Rs. 145 billion! Sucha colossal loss,which is second only to the loss incurred due to the depreciation of the currency will have to be directly attributed to the leadership of the present government, and hence they would have to be held accountable for this national loss sometime in the future, when impartial and independent inquiries could be conducted into these scams.
From the above, it is now clear that it has been the present government that has caused the situation that has led to the massive increases in borrowing and interest rates by their economic mismanagement as well as fraudulent practices, which has now resulted in all interest rates and payments, soaring out of control.
In recent times, certain government leaders havebeen unashamedly and blatantly lying that there were “hidden” liabilities of over Rs. 1 trillion which have been incurred by State Owned Enterprises, and that such liabilities have not been “disclosed” in any statement. Contrary to that ridiculous and untruthful assertion, astatement of “Outstanding Debt of Major Public Non-financial Corporations”has always been published in the Central Bank Annual Reports each year, while such liabilities have been reflected in the balance sheets of the respective SOEsas well. As per that normal practice, the Central BankAnnual Report 2015 (at page 195), has reported that the Outstanding Debt Major Public Non-financial Corporations as at 31st December 2015 wasRs. 861 billion, up from Rs. 755 billion in 2014. Of thissum, the Annual Report also showed that the Sri Lankan Airlines debt had increased to Rs. 33 billion in 2015 from Rs. 9 billion in 2014; an increase of Rs.24 billion, giving lie to the claim that the reckless borrowings in the national carrier was under the watch of the previous administration.
It would now be clear that the combination of the factors enumerated in this paper have led to the creation of the “debt trap” which is clearly due to the Sirisena/Wickremesinghe government’s wasteful, unproductive and unsubstantiated spending; reckless and in-disciplined borrowing; and fraudulent increase of interest rates to enable connected parties to make unconscionable profits/gains. At the same time, in order to cover-up these acts of mega mismanagement, the government has now embarked on a mega media campaign for the benefit of the ruling partiesviathe Ministry of National Policy and Economic Affairs, which is directlyunder the Prime Minister. This type of cover-up and distraction seems to be the now-popularmodus operandifollowed by the Sirisena/Wickremesinghe administration which, last year, successfully distracted the public from the investigations into the terrible bond scam by alleging improper and fraudulent conduct on the part of the previous administration, and thereby managed to “cover-up” the bond scamof February 2015, with a very high-level direct involvement.Hence, the present attempt to lay the blame for the “debt trap” created by this administration on the previous administration seems to an extension of that chosen strategy, to distract the public from the impending doom that the economy is now facing from the mega mismanagement of the economy, and the mega taxes that the administration is imposing on the battered public. In that context, it is hoped that this paper would set the record straight since it is vital that the top levels of this government are exposed as those whoare directly responsible for the current serious economic debacle and debt trap that is strangling the country today.