By MahindaRajapaksa –
In announcing increases in the VAT and income taxes, and the reintroduction of the capital gains tax the Prime Minister said in his special statement to parliament last week that the government has been compelled to increase taxes in this manner because my government had got the country into a debt trap. The country is now facing an unprecedented economic crisis and we should examine how and why things came to such a pass.
After coming into power, the present government obtained 400 million USD under a currency swap arrangement with India in March 2015. They obtained another 650 million USD through a sovereign bond issue in May 2015. Another 1,100 million USD was obtained from India in July under a currency swap agreement. A further 1,500 million USD was obtained through a sovereign bond issue in October. Between March 2015 and March 2016, the government issued short and medium term Sri Lanka development bonds on 12 different occasions borrowing over 2,711 million USD. Thus in the 15 months they have been in power, the present government has obtained 6,361 million USD in foreign loans.
To put matters into perspective, this is enough to meet the entire foreign loan components of the Mattala airport (190 million USD) the Hambantota Port (426 million USD) Norochcholai Coal Power plant (1,340 million USD), The Colombo-Matara Highway (630 million USD), The Colombo-Katunayake Highway (248 million USD) all put together, and there would still be enough money to build not one, but two Port Cities (1,400 million USD each) one 500 megawatt Sampur Coal power plant (500 million USD) and yet another Mattala airport with the final leftovers.
This government enjoyed foreign exchange savings of around USD 2,500 million in 2015 due to the precipitous drop in oil prices after they came into power. But they could not build up foreign exchange reserves or even make the Petrolem Corporation and the Electricity Board profitable. All these colossal borrowings including the massive savings from petroleum imports have been spent on consumption. It is because of the almost comic fiscal irresponsibility shown by the government that Sri Lanka’s credit rating was downgraded by Fitch and Standard and Poor’s recently.
Explaining their reasons for downgrading Sri Lanka Fitch ratings pointed out that the government had loan repayments amounting to 4,000 million USD this year which would place an immense strain on foreign reserves. Of this four billion, more than 2,497 million USD or over 62% of the total were loans that the present government had taken in just the past year. The 1.1 billion USD currency swap arrangement with India entered into in July 2015 for six months and taken in September fell due this year. Furthermore, of the Sri Lanka Development Bonds issued since March 2015, over 1,397 billion USD were short term bonds coming due this year. The share of the repayments due in 2016 attributed to all previous governments put together was thus just over 1,500 million USD. Fitch would not have downgraded us if the debt repayments had remained at a more manageable level as was the case when the economy was managed by my government.
This downgrade has led to a situation where it has become very difficult for Sri Lanka to borrow in the financial markets and they have been forced to rely on multilateral lenders like the IMF who impose conditions such as increasing government revenue to demonstrate that the borrower will be able to pay back the money lent. This is why taxes are to be increased. Last Friday the government had to repay the 1,100 million USD borrowed from India. This month, the government was so desperate for money that they issued Sri Lanka Development Bonds with three and five month maturity periods to raise money. Development Bonds are supposed to be long term instruments. But this government has been using them to raise short term funds. Usually any country would phase out the loans they take so that there is no ‘bunching’ of loan repayments. This government has been ignoring even those basics. Such things do not go unnoticed in international credit markets.
The last time Mr. Ranil Wickremesinghe was Prime Minister between 2001 – 2004, the government debt to GDP ratio was consistently above 102%. It is my government that brought this ratio down year after year until it reached 75.5% by the end of 2014. This was the lowest debt to GDP ratio achieved since 1979. During the war years from 2006 to 2009, government expenditure remained at around 23% of GDP but after the war, we controlled expenditure until it reached 18.3% in 2014 – the lowest govt. expenditure to GDP ratio since independence.
It is because of this demonstrated fiscal dicipline that the IMF gave my government a stand-by facility of 2.6 billion USD during the global economic crisis of 2009 without any of the strict conditions that they have imposed on the present government. My government did borrow money to build infrastructure projects, but these were long term concessional loans at 2% or less in interest. Furthermore such borrowings were spread out over many years. We never borrowed for consumption like the present government which is why there were no fiscal fiascos like sweeping revisions of budget proposals and constant revision of tax rates when my government was in power.
The prime Minister’s allegation that there are undisclosed loans and liabilities of my government which are only now coming to light, is also a complete falsehood. State owned enterprises engage in commercial activities and they have their own dealings with banks. Borrowings by state entities are governed by their respective acts of parliament and have to be approved by cabinet. Such borrowings are paid back from their own revenues. Some loans may be guaranteed by the Treasury and in such event are reported to Parliament.
The Prime Minister said during his special statement to parliament last week that he increased the salaries and pensions of public servants, and reduced the prices of fuel, gas, sugar, canned fish etc. He was claiming to have fulfilled all the irresponsible promises made during the Presidential election to win votes. The present precarious situation shows that there are serious consequences to contend with when you try to win votes by pledging the taxpayer as live collateral.
Even before the present debt crisis, the economy was in an uncontrolled freefall. The All Share Price Index has lost around 1500 points after 8 January 2015 and over Rs 600 billion has been wiped off the market capitalisation in the stock market. Foreign holdings of Sri Lanka rupee bonds have gone down by more than half during the same period. Foreign investors who kept renewing their investments when I was in power started exiting the Sri Lankan bond market after January 2015 because they have no faith in the economic management of the present government. During the first nine months of 2015, the unemployment rate increased by nearly 1%. The Rupee has depreciated more than 10%. Foreign reserves which at an all time high of 8,200 million USD at the end of 2014 have gone down to less than 5,000 million. In the coming months, all that can be reasonably expected are more tax increases, more cuts in welfare measures and increases in water, electricity, telecommunications and transport costs not to mention even more unemployment due to the continuing economic mismanagement of this government. The present government will have to be held accountable for the hardships the people will have to face.
*Text of a speech delivered by former President MahindaRajapaksa on the “Foreign debt crisis of the yahapalana government” at the Battaramulla office on Monday 14 March 2016.