By Asoka S. Seneviratne –

Prof. Asoka.S. Seneviratne

“Admission of ignorance is often the first step in our education” ~ Stephen Covey

Recent bitter criticisms by some opposition ex-parliamentarians regarding government borrowing (i.e., President Anura Kumara Dissanayake) have no substance; it is for mudslinging and due to ignorance of the subject matter. President AKD is performing his mandatory work responsibilities as the Minister of Finance, similar to ex-Prez Ranil Wickremesinghe. Borrowing by President AKD has no burden on the total debt or Debt to GDP as per the IMF Program. Payment to pensioners, fertilizer, and fuel subsidies are within the fiscal space. No funds have been borrowed and wasted at all. Fertilizer and fuel subsidies greatly benefit the economy in numerous ways. Given the recent meeting by President AKD with the agricultural officials, formulating a National Agricultural Policy and having a public discussion on the same is a top priority of the government in the right direction.

Introduction

Some opposition ex-parliamentarians bitterly criticize President AKD (Minister of Finance as well) for borrowing funds like ex-Prez Ranil Wickremesinghe (RW), so there is no difference between them. It is basically for mud-slinging aiming at the general election on the one hand and their ignorance of the subject matter on the other hand. Indeed, ignorance needs to be cured. It is customary that any government in power borrows funds to meet government expenditures based on Treasury Bills (T-Bills) and government or Treasury Bonds (T-Bonds). The Central Bank of Sri Lanka (CBSL) does the above task at the request of the Government of Sri Lanka (GoSL) or government Treasury, along with the financial regulations to meet government expenditures such as loan repayment at maturity and their interest or coupon payments—the recent borrowing by the government for the above. In short, borrowing is not a crime at all; it is done according to the financial regulations, such as within the limit to borrow, and there is no impact on the total debt or not exceeding Debt to GDP. President AKD strictly follows the above as per the IMF Program.

Government Borrowings after President AKD became president from 26 October to 18 October 2024.

All figures are in LKR millions

Please note that the above data/information is based on the publicly available data in CBSL website and author calculations

Given the above amounts, the following analysis is sound.

Over the last four weeks (i.e., since AKD took Office), the Total Scheduled T Bill + T Bond Maturities were Rs. 476 billion, and during the same period, the CBSL raised Rs. 568 billion from the new T Bill and T Bond issuances.

So, the excess cash flow raised by the CBSL on behalf of the General Treasury was at around Rs. 92 billion.

This is equivalent to USD 310 mn at the average exchange prevailed during the same period (USD/LKR = 296.00).

Even though the exact Foreign Currency (FCY) debt service payment details are not available, the annual requirement for servicing multilateral debt is at around USD 1,500 mn. It turns to a monthly FCY debt servicing requirement of the GoSL would be around USD 125 mn (please note that foreigners with US Dollars purchase T Bills and T-Bonds)  for which the GoSL should pay LKR (ie, raised through T Bills + T Bonds) to the CBSL and buy FCY unless they have sufficient FCY in Deputy Secretary’s Foreign Currency Account (DST’s FCY).

If we assume that GoSL paid LKR to CBSL and bought FCY, such shall have been required to pay Rs. 37 billion to buy USD 125 mn. So, the net excess remaining through T Bills + T Bond borrowings would be Rs. 55 billion.

This net excess cash inflow should remain in DST’s LKR current accounts maintained at the BOC and People’s Bank. Maintaining some excess cash buffers at DST accounts in state banks is prudent, as such buffers will be useful in managing excessively volatile interest scenarios and meeting sudden expenses. Prudent management of DST’s bank accounts is a prime responsibility of the Secretary to the Treasury and his team, who are seasoned Central Bank and SLAS officers with a wealth of knowledge and professional experience accumulated over the decades.

As a head of the state, President AKD and his NPP cabinet shall be responsible for formulating fiscal policy with the people’s mandate (through parliament) and allowing CBSL and Treasury Officers to execute the policy. However, in that policy formulation, the Govt. must take professional advice from the relevant officers, and an appropriate mix should be maintained between professional advice and political will. I wrote this because I wanted to avoid any unproductive criticism level against the government.

Given the above, President AKD is performing his mandatory work responsibilities following the fiscal management responsibilities. Indeed, ex-Prez RW did the same. However, given the situation and circumstances, President AKD increased the fertilizer subsidy to farmers, introduced a fixed allowance of Rs. 3,000/= per month to about 700,000 government pensioners, and provided a fuel subsidy to the fisheries sector.

These incentives may have an annual incremental cost of fertilizer subsidy to farmers (Rs. 30 bn), government pensioners (Rs. 25 bn), fuel subsidy to fisheries – there are 5,500 multi-day offshore vessels + 27,000 small-motorized boats (Rs. 20 bn). So, overall, these incentives would cost the Treasury about Rs. 75 bn per annum. Still, there shall be positive synergies especially in the Agriculture + Fisheries sectors, which are crucial in reviving the rural economy with more employment opportunities and allied industries (eg: Transportation, Storage, Retail, & Wholesale Trade) in the services sector of the economy. The President’s recent meeting with the Agriculture sector officials focused on the above. The National Policy on Agriculture should be formulated by the sector officials/experts and presented for public review/discussion/input as soon as possible. In another article, I will give the reasons for the above.

In short, a solid plan is needed to revamp the agriculture and fisheries sectors. The country can achieve an additional USD 3.0 billion annually by exporting more (tea, coconut, rubber, and spices) and reducing imports (like milk powder, fish products, vegetables, fruit, and pulses). So, all these production-based subsidies should be linked to respective sectorial plans.

*The writer, among many, worked as the Special Advisor to the Office of the President of Namibia and was a Senior Consultant with UNDP for 16 years. He worked as a Senior Economist with the Central Bank of Sri Lanka (1972-1993) before he migrated to New Zealand.