20 November, 2018

Blog

The Debt Trap – A myth, Reality Or Political Propaganda?

By Abdul Samad

Abdul Samad

Leading up to the presidential elections in January 2015, national debt was a major topic of discussion. It was considered as a major failure of the Rajapaksa regime, and was used as political propaganda by the unity government to influence voters. The objective of this article is to understand the gravity of this issue.

Generally, national debt of any country is measured as a percentage of its GDP. It reflects the ability of a country to repay its debt without requiring further assistance. Any financial institution or a government, prior to assisting a country considers two major factors. Present debt level and the potential of growth. An article published by Business Insider U.K. in Oct. 2015 listed out seventeen countries with the highest debt levels. Below table gives the information together with GDP growth of the countries. It comes as a surprise that Japan ranks as number one. It’s the third largest economy in the world. Bank of Japan currently has a negative interest rate monetary policy aimed at spurring growth. It continues to add stimulus in the form of mortgage backed securities and various other tools. Thus, expanding the balance sheet of the central bank adding to national debt. The above table also suggests, most of the countries do not experience robust growth. This questions their ability to re-pay debt. Does it mean the above countries are worse off than Srilanka? Singapore is considered as the economic miracle of the last fifty years. It was also one of the active participants from the Asian region to negotiate the Trans Pacific Partnership (TPP) with the United States of /America, a landmark trade agreement. Such is its economic presence in the region. Do Srilankans enjoy a better quality of life than the Singaporeans? It is worth noting, there are some European heavyweights in the above table. Sluggish growth is a common factor. The European Central Bank akin to the Bank of Japan currently adopts a very accommodative monetary policy aiming to achieve economic growth. The Federal Reserve of the United States of America raised rates in its last policy meeting, only for the second time since the 2008 financial crises. Almost a decade of accommodative monetary policy has ensured the lowest unemployment rate (under 4%) since 2008. Has excessive debt stopped America from being the largest economic superpower of the world? The result of such monetary policy has led to vibrant capital markets. Dow Jones is at record high levels akin to all major European indices. The bull market in America is nearing a decade. It is often the case with most of these countries that the capital market performance is a fair reflection of the economy’s performance.

Now, let us look at Sri Lanka and some of its peers in the SAARC region. The below table provides the information.Comparing India and Srilanka would not be right, two different economies with different geographical settings and size. The difference is too much to put it into perspective. Nonetheless, it’s worth mentioning that compared to Sri Lanka, India faces far greater Economic development challenges. It’s always vulnerable to socio-economic shocks more than Srilanka. Its large domestic market acts as a shield against global economic shocks. India’s growth is much driven not by its efficiency, but by its sheer size of the domestic market. Domestic politics and the media are two main obstacles to radical economic reforms. With Modhi in power, things are looking much better on the economic front. Does debt stop India from being the fastest growing major economy in the world?

According to the Central Intelligence Agency Sri Lanka is ranked 29th in debt levels. Srilanka’s Economy grew at 4.79% in the 2016. This is not a fair reflection of our economic potential. Post- war economy registered growth rates in excess of 6%, registering high’s of 9% in 2009/10. The present slow down is much to inefficiencies of the unity government and poor economic policy/planning. Central bank of Srilanka in its last monetary policy meeting raised rates. It is an appalling decision to further tighten a depressed economy, ruining the capital market. The Colombo stock Exchange is among the worst performing markets in the region. The government has accelerated its deterioration.

Coming back to the original discussion, it is very clear that Sri Lanka’s debt level is nowhere near alarming levels when compared to prominent economic powerhouses. The country also offers the potential to achieve 7% + growth easily albeit managed properly. The overall situation is not as grave as it was projected, leading up to elections in 2015. There was never a question of the Rajapaksa regime going bankrupt. In fact, political continuity would have propelled the country to a powerful force in the region. Fiscal policy to increase state revenue cannot help much in the Srilankan context to boost GDP with a limited domestic market size. Only resort to achieve sustainable economic growth is the use of the global debt market. Sri Lanka, if managed properly, certainly has the ability to pay its debt and service its finance cost. How many countries in the world offer growth in excess of 7%? How many countries in the world offer geographical supremacy? How many leading major South East Asian economy’s offer potential for financial deregulation? Singapore, Hongkong, Malaysia all represent highly deregularised financial policy. Sri Lanka has a competitive advantage in all areas. In an increasingly sluggish global economy Sri Lanka can be viewed as an investor’s paradise.

The Rational of debt

It must be understood when a country gets financial assistance, neither the borrower nor the lender wishes to be on the losing side. It has to be a win-win deal. Reflecting this in a micro sense, when an individual or a company seeks financing from banks, are they able to get it without justifying credentials? A thorough evaluation process is in place to justify the financing. The pre-requisites and stakes are far greater for countries. Sri Lanka’s borrowings are from some of the leading institutions with supreme credentials. The IMF, World Bank, Asian Development Bank, the European Union, India, China. Can Sri Lanka secure financing without evaluation? The Greek Bankruptcy was a classic example. The EU sponsored economic bailout was agreed following the Greek governments commitment to implement unprecedented austerity measures in its budget. It involved months of negotiations. Prior to the elections, voters were made to think that the government at the time received loans, assistance on a platter. This is a mere conception. It involves a lot of hard work, endless discussions, and lengthy diplomatic efforts to convince the international investment community. The case of Greece should make us realize the challenge of securing international financing.

I believe, all above facts and figures only offer one conclusion. The so called “Debt trap” in Sri Lanka is a mere myth. It is fair to state this is nothing but political propaganda. This also highlights, all accusations on the Rajapaksa regime are null and void. The truth is, it is being repeatedly used to cover up the inefficiencies of the present administration.

This raises one important question. Are the Sri Lankan voters so lame? The answer is very simple, lack of education. A good example of this is Singapore. A highly educated society has selected a strong leadership that has ensured continued economic success and political stability. Sri Lanka was well on its way to being the next economic miracle in Asia at least until the political catastrophe of January 2015. As citizens of this country we should have access to fair information.

Print Friendly, PDF & Email

Latest comments

  • 4
    0

    These Statistics are good for western countries. For example, In Japan, public has lot of money reserves. Even though Japanese govt promoted it, Public did not spend their last Yen they had.

    On ther other hand, people in the west take even loans to go on vacations. US economy is by selling big items, weapons, by transaction fees of their internationalized dollar, Petroleum sales – that is they profit by some one elses product sales. that is the same reason why IMf world bank wants smaller countries to promote imports and destroy what ever they have in the country. For example, phillipines has IRRI (International rice research Institute). Yet, Philippines import rice and US grow rice for export and other purposes and they consume only wheat.

    In Sri lanka, politicians spend like no tomorrow and they borrow and feed the country becuse people working in the middle east and korea etc., send money. See how Sri lankan politicians talking about importing 200 bousers, because no rains just for two months, Sri Lanka screwed up GSP. Later they found if approved LGBTQ legislation they would get GSP+ which amounts to only 0,1% of Sri lankan exports and $ 1.6 billion of exports. On the other hand, We could have stopped 0.2% of European imports, their cars coming into the country etc.

    In reality, Sri lanka should use foreign exachange to improve manufcturing inside the country. Instead, they borrow from every overseas bank including IMF, world bank, ADB – from countries, cash exachanges from china and India, bond and treasury bill sales. They don’t give jobs to locals with out own money. Instead, they pawn what the people send and borroe and pay that moneg to foreign companies. that is heavy wastage.

    See if they cut down imports of cars how much they can save from oil imports, parts imports etc and because of air pollution. Nothing happens.

    Anyway, Sri lanka borrows until the money flow from the middle east stops and at that time country goes bankrupt.

    • 4
      0

      China and the Rajapaksas had strategically planned these failed projects like Mattala Rajapaksa International Airport and The Magampura Mahinda Rajapaksa Port in Hambantota in a way that no intelligent nation would have seen it isn’t profitable and refrained from investing in them. Playing into the plan clearing any competition for china to use these projects to come in and use these projects to twist Sri Lanka’s arm by putting us in debt.

      Next they will take them on long term lease. (Our Government seems to be falling for that)

      Then slowly try and use them for military purposes after crashing these projects!?

      Rajapaksas wanted to crash the Sri Lankan economy so that it would have made things easy for them to divide and sell our nation while they made huge personal gains from them…

      Is this government letting these plans still play out or seriously trying to do something about them!?

    • 0
      0

      I get the feeling that Samad is not giving the correct picture, when he justify the previous regime’s spending regardless. on useless projects while people have no medicines in hospitals.
      Jimsoftly seem to give a rational explanation. All regimes seem to raid the treasury with bogus money wasting projects that give some people money in their pockets. To keep everyone in control they even bribe the sanga with luxuries.
      This will go on till they have exhausted all the foreign earnings of the expatriates and from that of our precious exports. Truly shameful that like of foreign lending institutions are part of this evil act against the people of the island.
      They are all at it.

  • 4
    0

    Japanese debt is owed internally. It is government or internal debt, not foreign debt. ‘Japan Post Bank’ actually holds most of its debt (more than 20%). The government has essentially borrowed from “ITS OWN PEOPLE” not foreign entities. This applies to many other developed countries.

    Even the USA 40% to 50% of its debt is owed internally to the Federal Reserve. About 25% to foreign government like China and other foreign entities. But people should not forget that the US economy won’t collapse so easily especially since the US Dollar is literally the present Gold Standard.

    This is not the case with Sri Lanka. How much of our debt is foreign debt?

    • 5
      0

      Thanos.
      “Japanese debt is owed internally. It is government or internal debt, not foreign debt”
      Very perceptive comment. I wonder why the writer fudged this angle? Looks like an attempt to compare apples and oranges.

  • 3
    0

    Lankan debts have Shylock written all over. GoSL – irrespective of who is power – is fast becoming a puppet forced by the nouveau-imperialists to hand over sovereignty.

  • 4
    0

    Looking at Samad’s Facebook page will tell you how much he’s in love with the Rajapakses. Your slip is showing mate.

  • 1
    0

    Debt! Debt! Debt! but the politicians have billions to buy super luxury vehicles?
    Yet! no money to finish an expressway?

  • 2
    0

    Abdul Samad,

    Thank you for writing this article. “Corruption” and “Debt Trap” are two slogans used by regime change strategists. When they keep on saying Corruption! Corruption! Corruption! people think that there is some truth in it and think of changing the regime. When they keep on saying Debt Trap! Debt Trap! Debt Trap! people get scared and think of regime change. That is exactly what happened in 2015.

  • 0
    0

    A even bigger problem in the uS is unfunded Liabilities, mainly Social Security, medicare, medicaid. At state level many Pension funds are going broke.

    I would imagine that SL too with its aging population has a pension funding problem.

    https://www.forbes.com/sites/realspin/2014/01/17/you-think-the-deficit-is-bad-federal-unfunded-liabilities-exceed-127-trillion/

    https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124

  • 0
    0

    Lies; damned lies; and statistics

Leave A Comment

Comments should not exceed 300 words. Embedding external links and writing in capital letters are discouraged. Commenting is automatically shut off on articles after 10 days and approval may take up to 24 hours. Please read our Comments Policy for further details. Your email address will not be published.