By W.A Wijewardena –

The heat-up of the debate on external debt sustainability is beneficial

The Central Bank has renewed the public debate on Sri Lanka’s external debt sustainability by issuing a fresh clarification on 4 July through its Public Debt Department or PDD (available here ). This is a salutary development since in democracies, the public has the right to express their views freely on action taken by authorities and the authorities have a responsibility to clarify their position on the issues raised.

Those who serve in public authorities are not owners but trustees who hold their position in trusteeship to the public. This has been eloquently portrayed in the opening page of ‘Mahinda Chinthana: Vision for the Future’ that “A ruler is only a temporary trustee and not an owner of your children’s heritage”. Thus, the current debate on the external debt sustainability in Sri Lanka between the Central Bank – the authority who manages the country’s monetary policy and external position in trusteeship – and the members of the public – the benefactors who have given such trusteeship to the Central Bank – should be viewed as an essential ingredient in the democratic way of managing a country allowing freedom of thought and free discussion.

A press release with so many shortcomings

A brief history of the current debate is as follows. It arose as a consequence of a Press Release issued by the Bank on 13 May in which it informed the public that ‘Sri Lanka continues to improve on UN-ESCAP parameters re. Country indebtedness’ (available here ). This Press Release had the following obvious shortcomings. First, it had spoken of the improvement of the country’s external indebtedness but based its claims on the central government’s external debt and not on Sri Lanka’s external debt.

Second, it had claimed that the calculations had been made as per the recommendations found in the UN-ESCAP Manual on Effective Debt Management issued in 2006. Yet, it had followed these recommendations only partially. Third, the data presented in the Press Release were contradictory to what had been published by the Central Bank in its Annual Report for 2013 raising doubts about their accuracy and reliability.

Fourth, the press release had assured the public that Sri Lanka does not face any external debt crisis since the calculations done by using the central government’s borrowings were all within acceptable ranges. However, the picture which had been presented in the Annual Report indicated that ‘Sri Lanka’ was moving toward the threshold of an imminent debt crisis in the years to come. Fifth, the press release had made its claims on the past data but any meaningful risk analysis should have been made on the basis of the future developments relating to the payment of the external debt by the country.

Since these were serious issues, this writer considered it a public service to present the true picture and warn the Central Bank of the undesirability of being complacent based on incomplete analyses. His intervention appeared under the title “Sri Lanka’s External Debt Sustainability: Complacence based on incomplete analysis may be the worst enemy” (available here ).

Many enter the fray, angering the Central Bank

The Central Bank’s PDD countered this writer by the issue of a second press release dated 13 June charging that this writer and others who had followed him had not realised that the calculations were based on the Government’s external debt position. However, the title of the previous as well as the current press release had clearly spoken of Sri Lanka continuing to improve on the country indebtedness and not the Government’s external debt indebtedness (available here ).

At this stage, two others acting in public interest entered the fray, one a legislator who raised it in Parliament (available here ) and the other writing in the penname Special Correspondent under the title “Wonder of Asia: Debt Sustainability through Comparing Apples with Bananas” (available here ).

This writer also responded by arguing that the Central Bank’s second press release on the subject had not answered all the issues but some selected ones thereby confusing the readers further (available here  ). The press release issued on 4 July has sought to answer only this writer, leaving the other two critics unattended.

The Government debt is not the country’s debt

The press release in question has once again confused the reader right at the beginning. The title to the press release indicates that it is on “Sri Lanka continues to improve on UN-ESCAP Parameters…” as it had done in the case of the two previous releases. The reference here is clearly on the country’s external debt and not on the external debt of the Government. But it has found fault with this writer as well as others who expressed their views on the issue for mistakenly identifying the Government’s debt with the country’s external debt.

This is what the press release says: “A few commentaries that have appeared in recent press articles and reports including that of Mr. W.A. Wijewardene’s (sic) regular column in Daily FT seem to have attempted to compare the Public Debt Department (PDD) press release highlighting the improvements in the Government’s external debt position against the outstanding external debt position of the country as presented in the Annual Report 2013.”

It appears that the drafter of all these press releases has taken the country indebtedness synonymous with the central government’s external debt indebtedness. It is not only confusing the readers but also misleading them because all the media which had picked up the first press release had reported that Sri Lanka had improved in its external debt indebtedness going by the title of the release. Since these press releases are vetted at several levels by senior officers before they are released, it is surprising how this fundamental error has crept into all the press releases in question. It also raises serious issues relating to the reliability of the data being released by the Central Bank.

PDD has gone beyond its mandate and capacity

Then, the press release in question goes on clarifying that PDD which manages the government debt reports on its external debt position while the bank’s Annual Report – a report submitted by the Bank’s Monetary Board to the Minister of Finance and through the Minister to the public – reports on the country’s external debt

There is no issue as far as this writer is concerned here since it is the true situation. However, the issue is that PDD which has to report on the Government debt has undertaken to report to the public on the “improvement of the country indebtedness” by using only the debt numbers relating to the central government. Since PDD has no role or capacity in analysing the country’s external debt, it has gone beyond its mandate and ability when it has undertaken to report on the country indebtedness. This is evident in the Annual Public Debt Report which PDD issues analysing the country’s public debt position.

For instance, the report issued by PDD in June 2014 under the title ‘Public Debt Management in Sri Lanka 2013,’ which has provided the source material to the first press release in question in advance has also talked about the country’s external debt sustainability though its discussion has exclusively been limited to the central government’s external debt position (p 43). A clarification has been presented in the form of a footnote to Table 24 on ‘External Debt Sustainability Indicators’ on page 43 qualifying that its analysis is based on the central government debt.

If the PDD wished to be true to this footnote, the correct title of the Table as well as the write-up based on it should have been “Central Government’s External Debt Sustainability Indicators” and not the External Debt Sustainability which gives a wrong meaning. The press release which has been released prior to the issue of this report, probably while it was still in press, does not carry any clarification.

Can a central bank force the public to accept what it says?

The PDD is silent on this issue all throughout its offensive press clarifications. It has demanded the readers to accept what it has meant by the wordings of its press releases despite the fact that those wordings have conveyed a different meaning. The tone of the press releases is not that of a professional central banker but someone who believes that he has authority to dictate to others what they should accept as truth. This is definitely not the role of a trustee as portrayed in Mahinda Chinthana. Further, when one uses a term wrongly, it fixes him forcing him to accept the consequences as well. Lewis Carroll has put it nicely in ‘Through the Looking Glass’ (p 197 of eBook) as follows:

“The cause of lightning” Alice said decidedly, for she felt quite sure about this, “is the thunder – no, no” she hastily corrected herself, “I meant it the other way”. “It’s too late to correct it” said the Red Queen, “When you have once said a thing, that fixes it, and you must take the consequences.”

Meaningful risk assessments should be based on the future and not on the past

The press release in question has very correctly said that the bank’s Annual Report has presented the country’s external debt calculated in terms of the 6th Edition of the IMF’s Balance of Payments Manual, known as BPM6. This writer has no dispute over this and in both his responses he had appreciated the updating of the systems in the Annual Report as per the requirement of BPM6. That is because BPM6 covers all types of external debt that may pose a risk to the country’s external debt sustainability.

What is at issue is that the Central Bank Annual Report was issued at end-March 2014 and the new innovation which it had introduced had not been mastered by the bank’s own PDD. The gravity of the absence of a proper communication system between two units of the Central Bank arises as follows.

PDD follows the UN-ESCAP Manual on Effective Debt Management which, as this writer has presented in his two responses under reference, is simply a codification of the best practices in quantifying external debt of the public sector and the country as a whole recommended by BPM6 and UN System of National Accounts. PDD had so far adopted the recommendations of UN-ESCAP Manual only partially. But when the bank has gone for BPM6, it is necessary that the systems should be harmonised throughout the bank in order to avoid confusion in its own analyses.

The PDD has made this grave mistake of treating the central government’s external debt as synonymous with the country’s external debt mainly because of this non-harmonisation of systems. This writer referred to this as a situation where one unit of the Central Bank does not know what other units of the Central Bank have been doing due to a breakdown of its internal communication system. The press release has refuted this claim though its existence is evident even from what it has presented.

Borrowings of Government entities too pose a problem

A country quantifies its external debt numbers not just to come up with a figure but to assess the risk factors that may arise from the changing pattern of the debt-structure. A government may through creative accounting report a low figure of external debt by getting the state owned banks and other entities to borrow externally and getting them to relend the loan proceeds to the Government. But if these institutions default their external loans, as the owner of these institutions, the Government will be required to bear the burden.

Since the Government is only a trustee and the true bearers of the burden are the people, UN-ESCAP Manual has recommended that they should also be categorised as public debt. For instance, if NSB or SriLankan Airlines defaults its debt, it is the public who will have to ultimately bear the burden. Thus, broadly speaking, private debt ultimately becomes public debt. This contingency liability should be taken into account in any meaningful debt sustainability analysis as this writer has argued.

Government entities have borrowed abroad not on the strength of their balance sheets

The press release in question has argued that those State entities have borrowed abroad on the basis of the strength of the balance sheets of those institutions. This is also misleading due to two reasons.

First, some of these institutions have strengthened their balance sheets not out of their business strengths, but out of the Government’s cleaning of those balance sheets by taking over the bad-debts or losses. Thus, the public has already taken a risk by absorbing their losses and it will take a further risk if these institutions default their external debt payments.

Second, some other institutions got their balance sheets strengthened by the explicit guarantees provided by the Government which are simply guarantees imposed on the public without their approval. NSB and SriLankan Airlines are two cases in point.

A good economic analyst should not ignore these crucial factors when he makes a risk analysis of their external borrowings. As such PDD has underestimated even the external debt of the broad public sector by confining only to the borrowings of the central government. Thus, its assurance given to the public that the debt situation does not pose a problem based on incomplete numbers is misleading. This is the crux of the debate and the Central Bank has so far not clarified it.

Harmonisation of analysis across the Central Bank is a must

This writer wishes to stress once again that there is a serious non-harmonisation of the systems being adopted inside the Central Bank. As he pointed out in his previous response, in the past it was done at the Deputy Governor’s level by freely exchanging views among different units of the bank. PDD has published the central government debt and used those numbers to assure the public that the country’s external indebtedness has improved. This is a serious mistake which has not been noticed by the bank’s senior officers.

A professionally-oriented central bank should have an apt vetting mechanism for its public communications to assure accuracy and use this communication instrument effectively. This requirement is emphasised as extremely important in all Central Banking communication training programs because it is only through such a mechanism that a central bank is able to maintain its credibility among the public.

The public does not approve of personal attacks on critics

The Central Bank may be under the impression that the personal attacks it makes on its critics are being appreciated by the public, but that is not the case. This was highlighted by a former Assistant Governor of the Central Bank, Dr. Anila Dias Bandaranaike, in a recent interview with Sirasa TV in its Artha-Tharka Series.

She emphasised on the important role which criticism plays by giving an advance warning of an oncoming ailment. She expressed her concern about the Central Bank’s degenerating to a low level of making personal attacks on its critics instead of addressing the critical issues raised by them. ( Available here)

The unwitting indictments made by PDD

The previous Press Release of PDD had unwittingly indicted the Monetary Board of the Central Bank for reporting a different set of numbers in its Annual Report 2013 – because it had not added remittances as part of the country’s earnings from export of goods and services when calculating the debt-service ratios. PDD had stealthily added remittances to the denominator of the ratios so that it could come up with low numbers. Its latest press release too has made an unwitting indictment against the bank’s senior officers for failing to note the difference between the Government’s external debt and the country’s external debt when they vetted all these press releases.

*W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, could be reached at waw1949@gmail.com