In an interview with Mirror Business, W.A. Wijewardena, retired Deputy Governor, Central Bank of Sri Lanka says that the country has fallen into a high indebtedness since independence and the solution now lies in attaining fiscal discipline.
Following are the excerpts of the interview.
What are Sri Lanka’s public debt structure and its characteristics?
Sri Lanka’s public debt can be defined narrowly consisting of only the debt of the central government and broadly composed of both the central government and other public entities.
These other entities include government corporations, government statutory boards, government academic institutions, government banks, etc.
For instance, the borrowings by Kotalawala Defence University (KDU) to set up its medical school and NSBM to establish the green University was included in these broad public sector borrowings. There are many, but these are just two examples.
In popular parlance, what is commonly meant, as public debt is a narrow definition. Since it hides more than it reveals the exact position of the debt owed by a nation, countries have now moved to this broad definition of public debt. This is because even when public sector entities borrow money, they eventually become a liability of the country’s taxpayers if they are unable to service the same. For instance, if KDU or NSBM fail to repay their debt, it is the Treasury which will have to pay it ultimately.
The Central Bank has now broadened the external sector borrowings to include all the public sector entities regarding the guidance given in the balance of payments manual number 6, known as BOPM6, issued by IMF. However, it has so far not added the domestic borrowings of all public sector entities to total domestic debt and continues to report the numbers separately.
When one looks at this broad listing, the picture is different from what is shown in the narrow listing. Thus, the total public sector debt at the end of 2014 amounted to US $ 77.6 billion or 97 percent of GDP. It consisted of a foreign debt of US $ 41.6 billion and domestic debt of US $ 36 billion. The comparable figure for 2015 was a total public sector debt of US $ 83.2 billion or 101 percent of GDP consisting of a foreign debt of US$ 43.2 billion and a domestic debt of US$ 40 billion.
But according to the narrow definition, it is not such an alarming picture. The total central government debt in 2014 amounted to US $ 57 billion or 71 percent of GDP. In 2015, it amounted to US $ 61 billion or 75 percent
Apparently, the narrow definition is misleading since it does not show the true indebtedness for which the taxpayers are responsible.
What is Sri Lanka’s current public debt level and how has it changed over the past 50 years?
The current debt level is as given above. But in the last 65 years, they have ballooned to unacceptable levels. For the year 1950, we do not have the broad public sector debt levels, and we have only the foreign and domestic borrowings of the central government.
Accordingly, the total external debt of the central government was US $ 26.3 million or 3 percent of GDP. In the same year, the domestic debt was US$ 111 million or 14 percent of GDP. The total central government debt amounted to US$ 137 million or 17 percent of GDP. These numbers show that the country has fallen into a high indebtedness since independence.
If the government fails to raise the necessary funds to meet its debt obligations, what are the steps taken to rectify this issue?
The only way to meet the expenditure is by printing money through the Central Bank if the government is unable to cut its expenditure or raise revenue.
What is the purpose behind the excessive increases in borrowing, specifically external debt?
First, Sri Lanka’s domestic savings, historically, has been very low. For instance, on average, Sri Lankans save only about Rs 17 out of Rs 100 that they earn. Thus, to maintain a high investment of about 25 percent of GDP, it has to borrow money from people outside the country naturally. That is why Sri Lanka has relied on foreign borrowings and those borrowings have increased.
Second, Sri Lanka has had a deficit in the current account of its balance of payments continuously since about 1953. To fill this gap, it had to borrow from external sources.
Third, the government’s revenue has been at a low level compared to its expenditure commitments. To fill the government’s budget deficit, it had to borrow from both the domestic and foreign sources.
The solution now lies in attaining fiscal discipline as announced by the Prime Minister in the economic policy statement delivered in Parliament in November 2015.
Is Sri Lanka’s external debt sustainable in the long run?
No, because its reliance on commercial and non-concessionary borrowings have increased in the recent past. About ten years ago, Sri Lanka was able to borrow from external concessionary sources because the country was classified as a poor country. But, when Sri Lanka graduated to a lower middle-income country around 2004, it also lost the opportunity for borrowing from this concessionary window. Now it has to borrow from commercial and non-concessionary sources and they accounted for about 69 percent of total external borrowings in 2015, up from 66 percent in 2014.
What are the legislations in place pertaining to powers to borrow, invest, issue guarantees and undertake transactions on behalf of the government?
Total central government borrowings are regulated by Parliament through the Appropriation Act which it approves while approving the annual budget of the government. It gives the breakdown of both the domestic and foreign borrowings which the government is authorized to raise in the following year.
There is no restriction for domestic borrowings of public sector entities if they are authorized to do so in the in the statutes under which they have been set up. However, the foreign borrowings are regulated by the Controller of Exchange, with respect to the Exchange Control Act.
What are the internal governance structures and practices in place to manage public debt?
The central government borrowings are affected as per the authorization is given in the Appropriation Act. As for the domestic borrowings, the Treasury issues instructions to the Public Debt Department of the Central Bank as and when it needs money to incur local payments. Foreign borrowings are approved by the Cabinet and if they are from individual countries or institutions like the World Bank or ADB, they are raised by the External Resources Department for the government. Any commercial borrowing by issuing sovereign bonds is done by the Central Bank, which is expressly authorized to do so by
What role does the Sri Lankan Parliament, IMF and independent commissions play in public debt governance?
In terms of the Constitution, public finance is managed by Parliament and it does so through the approval of the Appropriation Act. There is no role for IMF or independent commissions in this regard.
How would the Right to Information Act assist with improving transparency in terms of public debt?
Public debt is not an excluded subject under RTI. Therefore, theoretically, the citizens have a right to obtain such information. However, one has to wait till the implementation of the Act to see whether it is effectively done.
Finally, what are the government’s future strategies for managing public debt?
As announced by the government, it plans to reduce the budget deficit to 4.5 percent of GDP by 2020; it would provide some relief to the government in the form of slowing down the growth of public debt in the country.
The full solution comes if the government is able to go for a zero budget deficit or a budget surplus as has been done in Thailand and UK recently.
(Cathrine Weerakkody is a CIMA Passed Finalist, a graduate in Financial Management (UK) and currently reading for a master’s degree in Financial Analysis in the UK)