21 September, 2020

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The Economy Mahinda Rajapaksa Left To His Successors

By R.M.B Senanayake

R.M.B Senanayake

R.M.B Senanayake

In the last three years of MR’s regime economic growth was high and ranged from 7- 8.5%. The growth was driven by the government infrastructure investment program. Roads and expressways, ports and airports were built; funded by foreign borrowings mostly from China. The interest rates varied from 5-6%. But investments funded by foreign borrowing must provide a return both in local currency as well as earn or save the foreign exchange required for repaying the debt. The foreign debt was incurred largely by the government although during the last year the private sector banks and firms were encouraged to borrow in foreign currency and re-lend to the Government because the rate of interest was likely to rise for the government.

Foreign Funded Investments fail to produce returns

These government investments failed to produce returns. But every year the government is required to pay interest and repay the foreign debt. The government requires extra revenue in Rupees to buy the required foreign exchange required to repay the foreign debt. But the government revenue has not increased as a result of these investments. So it has to borrow. The Ceylon FT says the Government borrowed Rs 31.2 billion from the Central Bank. Similarly the foreign exchange by way of export revenue has not increased. So the authorities have to fall back on the Official Foreign Exchange Reserve to repay the maturing foreign debt. So the government has to borrow fresh foreign loans to repay the foreign loans falling due for repayment. The authorities have had to borrow the foreign exchange required even to pay the interest on the foreign debt.

Rajapaksa, Cabraal, Basil Rajapaksa speak during the presentation of the Central Bank of Sri Lanka annual report 2010, in ColomboNow, in the next few years about $ 5000-6000 million have to be repaid on foreign debt. The government requires both Rupees as well as dollars. The government revenue has not increased despite the large expenditure on infrastructure investments by the previous regime. The Rupees it is borrowing now from the Central Bank and the banking system since it exceeds the amount of savings by the public flowing into the money market. Economic journalists are saying that such money printing will cause runaway inflation. But such a result takes place only in a closed economy. In an open economy goods are imported and when the Aggregate Demand increases it spills over into an increase in imports. Since we are a highly trade dependent economy the excess demand caused by money creation leads to a worsening of the current account of the balance of payments. Our current account in the balance of payments already runs a huge deficit which is too high in relation to our capacity to repay it from our export earnings. The previous regime misled the people by ignoring the current account deficit and instead referring to the surplus in the over-all balance of payments. But that includes financing of the current account deficit from foreign fund inflows; either as foreign investments here or as foreign borrowings. But what it means is that we are borrowing foreign money or selling our assets to foreigners to fund the current account deficit. Any excess over the deficit goes to replenish our Official Foreign Exchange Reserve but it too is then built up by foreign capital inflows and not from our net earnings through the export of goods or services. In short we are rolling over foreign debt.

Roll-over of Foreign Debt is risky

The capacity to roll over the foreign debt cannot be expected to increase without limit. Even if it increases, the foreigners will demand higher and higher interest rates on such debt despite the Sovereign guarantee. Foreign borrowing is no free lunch. It is evident in the case of an individual for no individual can forever borrow money from Peter to pay Paul even at higher rates of interest. It is the same for a government. The rate of interest on new borrowings will keep on increasing. When foreign borrowings cost a high rate of interest then no government investment from such foreign finance will be economic. The local investment will have to produce higher and higher returns to justify the higher rates of interest. So the opportunities to use foreign finance as an instrument of medium or long term investment become less and less feasible. An irresponsible government of spendthrifts went on a spending spree and saddled the country with an excessive load of foreign debt. This is the country inherited by the new Government.

Assessing the Risk of Foreign Debt Default.

Economists use several measures to assess the desirable level of foreign debt. The last regime used only one and that was the debt to GDP ratio which they claimed was coming down and cited the much higher ratio which prevailed earlier. Yes, it was 59% in 2013 and was low but the composition of the foreign debt matters as much as its level. Previously much of the foreign debt was concessionary debt from International organizations like the World Bank or the ADB. Now foreign commercial borrowings constitute a significant share of the foreign debt. True we have never defaulted on our foreign debt. But that is not a plus factor but an essential factor for any foreign borrowing. A more useful indicator is the share of export earnings which have to be committed to service the foreign debt. This ratio is now 25% which is high and close to the level of 27% n several countries that defaulted on their foreign debts in Africa and Latin America. The Table below shows how the debt servicing cost is increasing. The figures for 2014 and the early months of 2015 are not.

RMB

The external debt servicing commitments in the 12 months ended November (2014) is estimated at US$ 5.7 billion and expected to increase by US$ 1.2 billion to US$ 6.9 billion by October of 2015.. Consequently foreign debt servicing is a strain on the balance of payments, as around 25 percent of export earnings are needed to meet foreign debt servicing costs. Repaying the foreign debt falling due for repayment is a challenging task for this Government.

Another indicator is the rate of growth in foreign debt compared to the rate of interest. In 2013 the increase in foreign debt was 7.1% well above the interest rate on the debt of 5% .When the rate of growth in foreign debt exceeds the rate of interest thereon, there is danger of debt default. Our rate of growth in foreign debt exceeds the rate of growth in exports, the rate of growth of the GDP or the rate of growth in government revenue all indicators of the high risk of debt default.

The options for the new Government

The new Government is pre-occupied with political problems and unable to address the seriousness of the foreign debt servicing situation. We are facing a serious crisis in the balance of payments. The growth in export earnings is quite inadequate to repay the foreign debt. The Central Bank continues to hold the Rupee/ Dollar Exchange rate almost fixed since the margin is very small and the Bank intervenes to keep the market rate within the band by constantly selling dollars from the Official Foreign Exchange Reserve. Last Sunday’s Ceylon FT said “US$ 243 million was drained off from the Official Reserve to protect the Rupee. Is it prudent to do so? The Rupee has been over-valued in terms of purchasing power parity with the U.S dollar and this situation makes our exports uncompetitive in a world where our competitors are depreciating their currencies. On the other hand our imports are too cheap and this stimulates the demand for imported goods vis a vis imported substitutes produced locally. We need to expand exports so that the burden of sustaining essential imports particularly of capital and intermediate goods does not fall entirely upon foreign finance. More import substitution is also needed for the same reason. Economists generally do not recommend controls on foreign trade since trade increases the growth rate. But when a country lives beyond its means and is on an unsustainable course then the lack of external equilibrium demands attention. The Current account Deficit is equal to the Savings-Investment Gap plus the Budget Deficit. So to correct the Current Account the budget deficit must be cut in absolute value. Bamboozling the public by reducing the budget deficit to GDP ratio will not work. The growth has to be reduced not increased. But the new Government will not want to slow down growth. But the Government must ask the question who benefited from the high growth of the previous regime. It is those who engaged in foreign trade – the importers of vehicles and other imported goods consumed by the affluent. The regime encouraged the import of vehicles 9gnoring the loss of foreign exchange and the lack of capacity of our road system to cope with a larger number of vehicles. Now it may be necessary to limit the number of vehicles entering the City through a tax on road space usage. The UNP with Ranil at its head has always managed the economy with a sense of responsibility. But good economics doesn’t seem to pay in our country where populism has long held sway at the expense of growth. So the new Government has a difficult task before it. It can ignore the ballooning current account deficit in the balance of payments only by more and more foreign borrowing. But this would worsen the foreign debt repayment problem and only postpone the day of reckoning. But that would be irresponsible economic management. Probably MR was advised by his Economic Advisers about the looming foreign debt crisis. It is perhaps this risk rather than astrology which prompted him to call for early election.

The new Government has to tackle the balance of payments problem without too much of a reduction in the growth rate. This is a difficult task for the remedy for correcting a current account deficit is not growth but deflation. The Government must reduce its budget deficit in absolute value and promote private sector growth stimulating export growth and import substitution. The previous regime accumulated payment arrears to downplay the budget deficit. All such payment arrears should be cleared by borrowing. Those officials who violated the regulations regarding the dep0loyment of funds as per budget should be surcharged. Where Ministers have misused funds they should be surcharged and the money recovered without waiting to file legal action in courts.

It must give priority to tackling the losses of the State Corporations. These State Corporations should all be listed on the Stock Exchange as China in the 19990s closing down those that were bankrupt along with their large number of employees. The others should e asked to raise capital in the stock market by way of shares or debentures. If they fail they should be sold by open tender at a price not below the net asset value but preferably at least twice such net asset value.

The only way ahead for the new Government is to tap the private sector for funds to finance the infrastructure investments program- a Public Private Partnership. But the projects must provide financial returns exceeding the costs. Priority may have to be given to those projects which can be funded as PP Partnerships.

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  • 9
    12

    R.M.B Senanayake –

    RE: The Economy Mahinda Rajapaksa Left To His Successors

    “Now, in the next few years about $ 5000-6000 million have to be repaid on foreign debt. The government requires both Rupees as well as dollars. The government revenue has not increased despite the large expenditure on infrastructure investments by the previous regime. “

    The ‘Infrastructure”Investments were Mahinda Rajapaksas Political and Family Future, and his Ego. He wanted to be popular like the actor MG Ramachandran tamil Nadu.

    Unfortunately, Mahinda rajapaksa was not a good Actor. He Is not a good comedian either. He was no economist.

    He is a liar and a crook. He is counting on the Modayas, Mootals and Fools low IQ.

    In the Meantime, All the Modayas and non-Modayas alike will collectively pay

    “Now, in the next few years about $ 5000-6000 million have to be repaid on foreign debt. The government requires both Rupees as well as dollars.”

    The Economy Mahinda Rajapaksa Left To His Successors

    • 1
      1

      The Sri Lanka stock market which is the CASINO of the rich and a castle of PAPER MONEY is crashing these days! Good thing too!

      The government MUST concentrate on the REAL ECONOMY i.e. generating decent jobs and PRODUCTIVITY.
      Generating good jobs in the industrial and manufacturing and Research and Development sectors is a prerequisite for REAL GROWTH OF THE REAL ECONOMY.

      Arjuna Mahendran and the paper money castle, stock market casino he overseas deserve each other!

    • 3
      0

      Govt. of Sri lanka should ask China to cancel its debts on the Norochcolai plant, the Hambantota White elephants (port, airport, stadium) and on the Colombo port city which is an environmental and development DISASTER in the making.

      China after all cancelled Bangaldesh debt incurred on the Chittagong port..

  • 8
    12

    Yes, you are right on the money
    These government investments failed to produce returns. WHY?
    Most of the developments were Legacy Development
    Port, Airport, 6 star standard rest house in Northern Jaffna who advised them seems like MR family were running wild with the foreign Loan , no check and Balance

  • 8
    11

    The 5 billion dollar stolen assets of the Rajapakses if recovered could pay off some of the debt.I would love to supervise a work gang of these thieves than let them languish in prison.

  • 6
    11

    People discuss all those negative things. Insult people in the worst manner.But at the end of the day most of those blamed as well return to the same place with nothing left. I cannot understand this phenomanon since I am a mad person in this society. Some times I feel mad is good in a society like this.

  • 1
    13

    You [Edited out] I am surprised you wrote an article like this. Knowing every unfruitful projects you think we grew 8% anually? [Edited out] brain loans are taken no money coming in but shit has to be paid. millions billions are robbed. And your [Edited out] is telling us that we had a economic growth? [Edited out]!

  • 10
    13

    The Pajapakshe wealth must be confiscated to pay for the following useless mindless projects they borrowed from the Chinese to build. MIA (now abandoned) Magampura Port (barely functioning at a dead loss), Conference Center and cricket stadium ( built in the middle of nowhere and pretty much useless), Botanical gardens (again laughable for the location and the plant varieties grown). One foot note about the Chinese culpability in all of this. No other responsible foreighn power would loan an idiot money to build these monumental blunders accept good old crooked and corrupt China.

  • 7
    18

    Bullshit and a heep of crap. This country emerged from a failed state where growth being lowest and a runaway inflation of two digits in 2006 to one of the fasted growing countries in the region. Some People who did not know whether they are living or dead then have now started to come up with their own opinions to belittle what President Rajapaksa achieved with the support of others who made supreme sacrifices in the field of ecconomy and security. People of country who are living now lived before 2006 as well and were not sleeping to understand who did what and what was best for us.

    We must stop experimenting. Are we not in a mess under Sirisena Wickramasingha duo?

    • 6
      6

      I am really amazed that sycophants like you, Mohan W. still exist with their heads buried in the sand. I am pleased with the analyses by R.M.B Senanayake and his brillian report. Please read it again if you cannot fathom what he has said. Sooner or later we have to bring in an austerity program that would be unpopular if we are not to become a defaulter and a failed state which would be utterly detrimental to our survival and our sovereignty that we are so proud of. I am not sure of the objectives, but some of the policies issued from the Central Bank/SEC are diabolical. Apart from depleting the foreign currency reserves to strengthen the Rupee, they introduced a restriction in June 2013 how the Rupees in the mandatory SIA account owned by Foreign Investors could be spent i.e. only on investments. On the contrary, local expenditure from this account should have been encouraged because, legally, this money could be converted back to its original foreign currency and repatriated.

      • 2
        7

        Brillliant?. My foot. Let us hear from Mr Senanayake, stooge of Ranil . If he has such financial rectitude and is a man of integrity why did he lose election after election for 20 years. This is the only country in the world where a politician has remained the leader of the opposition and shamelessly still remains the leader of the great demoratic party, the UNP. He has eleminated all aspiring honest, educated people from the party. He has been able to do so only because of the support from the separatists, the religious minorities who are aided and abetted by NGOs and the neocolonialists. Ranil has shown his true colours within days of assuming power.
        Sylvia Halik. Who has propped up the rupee since the last election?.What economic sense is to impose retrospective tax on companies who eaarn us foreign exchange? Who appointed a foreigner as the governor of central bank whose family runs a private company dealing in government bonds?
        Let us scrutinise the economic record of this government over the past 75 days.This is pure vandalism if not recklessness.When an autocrat like Ranil who has not stepped outside colombo 7 in his life and wields ill-gotten power this is the consequence.
        Ranil has decimated the great political party which was home to leaders like D S Senanayake, Dudley, Lalith Athulathmudali and Gamini Dissanayaka.
        Let us not allow him to ruin the country with his new found bedfellow Choura Rajini, Chandrika.

        • 2
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          “If he has such financial rectitude and is a man of integrity why did he lose election after election for 20 years.”

          What are those election [Edited out] ? Can you tell us, so I can reply you.

        • 4
          3

          Ranil had won both 1999 and 2005 Presidential elections , but due to some external forces his victory was taken away , in 2005 MR bribed Prabakaran to boycott the election and 1999 a female suicide bomber was sent to assassinate CBK , Sympathy votes did the trick for CBK.

          • 1
            2

            Mr Sri lal. Pleaese give due respect to the man. Call him Mr Prabakaran. Also may I remind you Ranil is the only Sinhala leader who was not targeted by LTTE. Does that say something?. Have you any thing called a conscience . Even after the election Ranil has visited only Jaffna, which he did twice andmet politicians there, but he has not visited any predominantly sinhala areas not even tried to address their economic social or political concerns. Have you got something called conscience Mr Srilal ? if that is your real name.

  • 4
    14

    So what?

    All pindits like this have been saying these things in the past. Aren’t many countries including the US in the same debt trap? Even oil rich countries are borrowing to make ends meet. But life goes on…

  • 3
    15

    A few years ago due to corruption at the top of the political ladder
    that bankrupted the economy, resourceful Argentina stepped in and took hold of savings deposits of their citizens, local and foreign. Understandably, this raised a huge national public hue and cry but
    the government had no alternative but to go ahead.

    Men like PB Jayasundera, Ajith Cabraal et al knew the actual status of health of our economy but they continued to paint an unrealistic but rosy picture to the ruling elite. The country was going down the drain although the people were busy blaming the Tamil diaspora for all ills. The indispensable Coconut at over Rs.75 and average Rice at Rs.100 – almost 50% increases compared to an year ago gave indications of the real state of the economy. RMB says here Rajapakse advanced the Presidential Election more to keep news of the collapsing economy from the country at large rather than for astrological reasons. It may well be true. The Dam will burst soon if and when the dollar is traded at its actual value. If the State is forced to impose a tax on road usage – due to corrupt politicians allowing an explosion of vehicle imports – the poor quality of governance of the Rajapakses should be held responsible.

    Backlash

  • 9
    14

    Look at that picture. All rogues. Mr 10 percent on the right in serious dicussion with Mr 100 percent in the center, seriously discussing how best to hide their looted money with the help of Mr any-percent-would-do on the left.

  • 2
    11

    Then why did the present govt give goodies to people including a reduction in fuel prices. The writer is a political animal like some of the current politico economist enjoying ministerial posts.

  • 4
    11

    Mr Senanayake is making ridiculous assertions, unbecoming of a former deputy governor of CB.
    To say that Ranil as PM always managed the economy responsibly is a blatant lie. Look no further. He increased the salaries of all government servants by a fixed amount of Rs10,000/ in the interim budget. This itself is pure bribery of the voters. Thus the salary of a lowest paid worker increases by 75%, and the middle income worker gets 10% increase. Secondly, as any 8th form student can grasp, when the salaries are raised, inflation follows and, as night follows day, the the price of goods will rise.
    Adding insult to injury, Ranil orders the private sector employers to follow suit. Thus the cost of our exports will inevitably rise , making us less competitive in the export market. Erudite Ex-deputy governor conveniently ignores this blatant fact. Not even in the former communist countries has such recklessness been perpetrated.
    People of this country have not forgotten how he, at the behest of IMF, unleashed the bull in the china shop policy of mass retrenchment of public servants during his previous tenure as Prime Minister.
    Now for political expediency he has turned a full circle in the mischievous hope of reinventing himself as the darling of the public service.
    Then comes the appointment of new governor of CB. Ranil brings in a total outsider whose credentials are suspect, who has no avowed loyalty to citizens of this country, who has not worked in a bank in this country, whose family is deeply involved in bond market and who, within two months of assuming office, becomes the first ever governor to be accused of the most heinous crime in the history of banking in this country.
    When the respected, so called ‘unbiased intellectuals/profesionals’ like Mr Senanayake has the audacity to mislead the unsuspecting public what future can we dream for this country.

  • 1
    10

    Very good commentary by Senanayake. I strongly advise ill educated comments, Don’t take it in critical manner. The former government did it with the full support of all qualified people of CB and Ministry of Finance. Their objective is right. Investing on road ports, air ports and Electricity and port city and tourism is the right way. Things should move forward whatever manner. The plan is to see Sri lanka on 2030 not just two years as everyone talked about. They ended blood shed, Started major infrastructural development.

    There is no money taken away by Rajapakse. for what. They know every well the international law. If they had earned so much money they wouldn’t have lost last time to unknown person like Mithree. Rajapakse would have never called for elections. I have gut feeling even Ranil would have won. But Chandrika set it up and discouraged Ranil as she knows Real Ranil very well. Suppression of any opinion is Ranil Motto.

    rather than blaming for what has happened lets move from the reality and ground situation. let corruption be handlled by authorised and paid employees of government or appointed special investigators. Talking about corruption is not a marketable product any more. More and more you redicule Rajapakse people will get close to him.

    • 1
      7

      It is true that previous government did it with the full knowledge of the CB and Finance officials. They did not have the option other than agreeing with hard line Mahinda & Co who controlled almost 90% of the investments. It is also true productive investments in the needed infractures with a higher benefit cost ratio is the right way for development means the benefit of the returns should provide employment, and income distribution benefits. The Hamantota airport and harbour project were politically motivated rather than economic motivation. It is now very clear that project was a disasterous and it is not a viable project. Further it is very clear now that projects would have negotiated with substantial reduction in the cost. The previous regime is the worst corrupted regime Srilanka ever had.

      It is a wrong statement that “they ended bood shed”. They ended the war after a massive bloodshed with large number of civilans deaths and the nation suffered a lot in terms of image (war crimes, genocide, human rights violations, dictatorship etc.) and economic potentials. The end of war did not resolve the problems the nation faced over six decades and there is no political stability even now. There is no gurantee that there will be no bloodsheds within 2030. The nature of politics of the extremism within Sinhalese and allowing Rajapakse & Co to continue without bringing them to face justice may lead to another bloodshed very soon.

  • 3
    9

    Master piece from R M B.

    Don’t worry since the GOSL numbers are cooked.

    Inflation is 0.2% this month!!! But Most essentials are up 30-40% in one year.

    Interest rates will go up and exchange rate will deteriorate. Stick market will be down,

    Ranil lacks a back bone to list the SOEs on the stock exchange since it is not good politics.

    Ravi will do anything to please the voters.

  • 3
    7

    Sri Lanka has no business to borrow or to be poor country.when British left we had surplus of foreign reserves.I think people should rise up and ask the leaders – what is happening to our money.it is used by politicians to hide away in Dubai and Swiss.if Singapore can achieve the highest standard of life foor it’s people without no natural resources not even water why not Sri Lanka with all the resouces Tea,rubber,precious stones etc. successive govts.use race card to deceive people.Also purposely they don’t educate the masses so that they don’t ask intelligent questions.Imagine MR has smuggled rs 6500 million.He used race card and race issue to make money.He even dares to come back.As long as there are fools in the country the country will be fooled and there is no end.Now people should rise up and demand higher standard of living.fellows like Wimal etc should be banished from the country to progress.

    • 2
      6

      If not for people like Das who have no allegiance to the country of birth , who consider [Edited out] .What about the billions of rupees allegedly transftered by the LLTTE financier Rajaratnam to Ravi Karunanayake and 3 billions made in one day by the family of the newly appoinyed governor of central bank, Mahendran, [Edited out] This country will lose to the tune of thirty billion rupees within the next 10years.
      What do you have to say about this Mr Das.

  • 0
    0

    The only way is for intellectuals to contest elections.

    We must promote professionals, entrepreneurs and academics to contest elections.

    Not thugs and goons.

  • 0
    0

    I have to agree with Giguruwa that Ranil has tainted his record for good management of the economy in the past by giving all these goodies in the recent budget and introducing unorthodox taxes.

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