Colombo Telegraph

Medium-Term Debt, Deficit & Investment Scenarios Are Gloomy: Sri Lanka’s Bleak Economic Outlook

By Kumar David

Prof. Kumar David

There is a tendency, natural perhaps, to read essays on the economy through tinted glasses asking “Which side is he supporting?” Certainly, I do have an axe to grind in future elections, but not in this essay because the bottom line, details aside, is valid whether the government is UNP or SLPP. You can disagree about party politics and still find my story interesting, so read it on its merits. There are four ways in which the economic outlook can be examined in the medium-term; the national debt, crucially dollar-denominated (foreign) debt, second export prospects and trade deficits and balances, third fiscal (budget) issues and finally investment and growth.

A plethora of numbers does not illustrate, it conceals truth in a sea of details. For this reason, I will minimise statistics and when used keep the picture broad. Central Bank stats for the first half of 2018 are available and I have multiplied by two with minor adjustments to give an all-year picture. I have used dollar depictions as I don’t know where the rupee will be in say six months. Year 2018 GDP will be about $92 billion and the annual growth rate about 6.3%; at year end debt will be $72 billion (78% of GDP) of which $33 billion (36% of GDP) will be foreign and domestic debt will be $39 billion (42% of GDP) but in rupees. Nearly a quarter of foreign debt is owed to China. Servicing (interest and repayment), recycling debt and fresh loans will entail borrowing about $2 billion foreign and rupees equivalent to a further $2 billion, on average, in each future year. 

The debt-spiral into the abyss

The lethal threat confronting Lanka is indebtedness. Since independence this country can boast that it has never defaulted on its dues, but the Sisyphean task of taking new debt to service existing debt has gone on and on. This is a recipe for sinking further into debt and growth stagnation. My column of 9 September was about governments, businesses and households mired in global debt. The creditor on the other side of the balance-sheet is the so-called 1% (actually about 8.6%) global ultra-rich. I followed this last week (7 October) depicting how this intertwines with the rise of finance-capital to global dominance. This underpins my approach to Rajapaksa Populism and its class bases in my 23 and 30 September columns. Inquiry must be up to date, not regurgitation of discourses of past decades – Siri Gamage’s October 7 lament about my pieces. Still, his intervention though an old hat is useful. It is time to integrate a theory of finance-capital into the analysis. Readings on neo-populism scrutinise evolving class relations in modern, actually existing, capitalism. On both counts it is vital that understanding keeps pace with emergent reality.

It is very difficult, ‘structurally difficult’, for countries and firms to escape the debt spiral; ‘structural’ means the way things are organised and the way things get done. I cannot repeat it all here but the core concept is that in a finance-capital dominated world it is near impossible to escape the tyranny of compound-interest, or avoid taking on new debt to service existing debt, or avoid forced sale of prized national assets, vide Hambantota Port. In the coming years, an unable-to-service-debt Lanka may have to sell off part of the public domain to pare down debt. The Petroleum Corporation, CEB, Colombo Harbour, Port City, a future LNG supply monopoly and above all Mannar Basin if worthwhile deposits are confirmed, are potential targets. Predators for projects on this scale will be international with local firms as front offices. 

Indebtedness of Asian countries

Lanka’s primary revenue account (that is without capital expenditure and debt servicing) has been pretty much in balance for the last several years. It is debt servicing that is driving the country to the wall. In simple words, if not weighed down by the need to service accumulated debt, Lanka would not need additional borrowing except for capital works. To make it worse repayment (amortisation) is lumpy as tranches fall due at different times. Year 2019 is pretty bad; the government will have to cough up $4.4 billion for debt servicing. No way can it find this from revenue or magically expanded export earnings. It will have to roll over debt. You may recall my two articles detailing the clutches of compound-interest and countries sinking deeper into slavery to global finance-capital. The $ 4.4 billion due in 2019 cannot be met from reserves either, which stand at just $9 billion, without fear of starving in an emergency.

I am glad that the CP’s DEW Gunasekara and the LSSP’s Tissa Vitarana have intervened on economic issues. The challenge is more than domestic, more than the incompetence of yahapalana or the corruption and ignorance of the Rajapaksas. Debt enslavement is global, the well-oiled machinery of global financial-capital lends money that it knows cannot be repaid; the end point is privatisation of the public domain as in Chile, Argentina and Greece. The Greek bailout was on condition 50 billion Euros of public assets be eventually transferred to foreign and domestic creditors. Lanka cannot fight global finance-capital in isolation; it must seek international alliances. And for the Left, a return to Internationalism is a must. 

The trade-deficit and exports

Any donkey knows that if a country enjoys a large trade surplus (goods and services) and boasts a surplus in its current account (that is including other inflows and outflows) it can pay down debt and escape purgatory. But not every donkey seems to appreciate that when a crisis is acute it is impossible to achieve a trade surplus in the short term by the magic of “export orientation”. Although 10% improvement in exports was achieved in 2017, imports burgeoned by a larger amount. Bear in mind that in 2017 exports were $11 billion while imports were nearly double at $21 billion. The trade deficit will worsen in 2018 because about 30% of the import bill is spent on petroleum, gas, and coal for the CEB. At the time of writing the price of oil has risen to $85 a barrel and is forecast to go up further – in recent years it stayed between $50 and $60. Oil will drag all energy prices up with it

Of course firming the economy with an eye to export orientation is good but that’s a medium if not longer-term perspective. Lanka will be drained by debt before that. The immediate option is to curb luxuries and reduce non-essential imports.  Urgent measures, if accompanied by growth will be accepted by the public; restrictions can be eased in a year if the economy improves. To reiterate, the emergency step has to be unpopular and un-UNP import curbs; there is no alternative. But the crux is not imports and exports; it is the absence of an investment and growth strategy. 

The budget

Revenue and current account expenditure have been pretty much in balance in recent years at about 13% of GDP (except 2016 when revenue dropped below 2% and 2018 when it may rise to 16% due to higher VAT). Revenue is low because of poor collection, evasion, loopholes, the rich not taxed at adequate rates, and inheritance and capital-gains tax rates too low or inapplicable to many. Revenue targets must be set at 25% of GDP – in European countries it is higher. I do not see this happening here, UNP or SLPP. 

As important as revenue-expenditure relations are for survival, inadequate revenue adversely affects capital expenditure. For the last 30 years (after the last Mahaveli project) nothing much has been done except China supported wasteful infrastructure.  I have no illusion that Ranil or Rajapaksa will raise revenue as suggested in the previous para or push forward productive industrial and capital projects, but I flag this concern to give readers a perspective. It is a class issue; not only domestic but also global class relations; the IMF/ADB/IBRD and in a way China too factor in. 

Investment and growth

For ten years Rajapaksa regimes did nothing to enhance production, only built airports sans airplanes, concert halls sans an audience, needle towers that are useless for signal relaying and cricket stadiums at which even gudu is not played. Senseless billions down the drain. The current yahapalana lot frittered away three years chasing liberal-bourgeois illusions (Ranil-Malik-Chartiita-Eran-Harsha mantra now joined by Mangala) and has nothing to show in economic achievement. Politically it fell flat on its face on 10 February 2018. This shambles was the low-point of the UNP, and decapitation was Sirisena and the SLFP’s end game. 

I could jeer “I told you so!” pointing to my three years of writing on an alternative economic strategy; but bigshots don’t know of the existence of this humble column. I sketched an alternative to liberal-capitalism; in a word it is state-directed intervention – dirigisme economics – which has proved successful in about half a dozen Asian countries and recently caught India’s eye. The Central Bank Governor recently said: “Current monetary policy is appropriate to address prevailing imbalances in the external sector”. Maybe, but the point is not monetary policy, it’s the government’s lack of economic vision. But, more seriously, jeering would be a pyric victory; is Lanka to throw yahapalana out and bring back the tyranny of Rajapaksa? Hobson’s choice!

You know there is a Trump Base in America, unshakeable even were DJ to take his pants off and dance the jig on Broadway; likewise, there is a Never-again-Rajapaksa (NaR) base here. Its 10 February minimum was the minorities and a third of the Sinhalese; that’s NaR’s rock bottom. The point is that though the economy will not improve in yahapalana’s final year, NaR will not erode further. In stock-market jargon NaR voters have “factored-in” poor economic performance.

DEW and Tissa’s turn to economics, if sustained by a robust campaign and firmed up by concrete proposals, can be useful in two ways. First it could push yahapalana to a few better-late-than-never policy shifts and stir class skirmishes in the UNP. Second and far more important, it could blunt Rajapaksa Populism’s racist narrative. If the left within Rajapaksa’s fold were to confront and check racism internally, of course it would be helpful. One final point and I’m done: Broadly, what are the two left-lumps doing? One is conjoined to Rajapaksa’s buttocks, the other waits patiently for Ranil to pass gas on a new constitution. As for the JVP, it is lost in never-never land. The muddle on the left defies logic. I must stop; it’s bad for my hypertension. 

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