September 9, 2018, 9:42 pm
By Ajith Nivard Cabraal,
Former Governor, Central Bank of Sri Lanka
Governor of the Central Bank Dr. Indrajith Coomaraswamy has, recently, stated that the Central Bank is to soon raise USD 250 million through the issuance of Panda Bonds. Such funds would be in addition to the Syndicated Loan of USD 1,000 million that it has already raised recently through the China Development Bank.
Sri Lanka’s public debt was at a value of LKR 7,391 billion as at end 2014. Of it, the loans from China amounted to approximately LKR 585 billion (USD 4.5 billion), or 8% of the total. At the same time, the Debt to GDP was at a manageable 71%, (down from 91% in 2005) and the interest cost in 2014 was LKR 443 billion or 4.2% of GDP.
Sri Lanka’s debt related relevant data, as at the end of 2014, would confirm that there was no truth whatsoever in the suggestion that Sri Lanka was in any ‘Debt Trap’ at that time:
* Debt to GDP ratio: 71% (down from 91% in 2005)
* Total Debt - LKR 7,391 billion; of which, External Debt - LKR 3,113 billion: Domestic Debt – LKR 4,278 billion
* External Debt to GDP: 30.0% (down from 39.0% in 2005)
* Domestic Debt to GDP: 41.3% (down from 51.6% in 2005)
* Average time to Maturity of Domestic Public Debt: 5 years and 8 months (up sharply from 2 years 5 months years in 2005)
* Total Chinese Debt, mainly Project-related: USD 4.5 billion
* Percentage of Chinese Debt out of Total Debt: 8%
* Total International Sovereign Bonds outstanding: USD 5.5 billion
* Percentage of ISBs, mainly held by US and Western Investors out of Total Debt: 10%
However, by end July 2018, Sri Lanka’s Public Debt had zoomed to around LKR 11,971 billion (Please see Computation 1); a staggering increase of 59% in just three and half years, while the interest cost for 2018 is estimated at LKR 820 billion, or nearly double that of the 2014 interest cost. The Debt to GDP ratio as at 31st July 2018 has also reached an alarming level of 87.0%. (Please see Computation 2).
Further, according to the publicly available information, the government’s total external debt had also since increased by a massive 33%: from USD 23.7 billion at end 2014 to at least USD 35.4 billion by July 2018, of which, International Sovereign Bonds which are mainly held by US and Western investors, now account for about USD 11.6 billion.
This debt escalation has taken place in an economy that has recorded a serious declining GDP growth rate; from a healthy average of 6.4% from 2010 to 2014 to a dismal 3.1% in 2017. The GDP growth rate for the first half of 2018 has also not shown any signs of recovery, and key sectors such as construction have experienced significant negative growth. Accordingly, the Central Bank of Sri Lanka has reduced its 2018 GDP growth projections to under 4% though most analysts now expect it to be considerably less than 3%.
In the meantime, the country’s external trade deficit has ballooned substantially from USD 8,287 million in 2014 to USD million 9,619 in 2017. The Central Bank’s press release on 27th August 2018 reported that the trade deficit for the first half of 2018 had widened to USD 5,709 million as against USD 4,751 million in the first half of 2017, reflecting the continued worsening of the trade deficit owing to sluggish growth in exports and double digit increase in imports. On that basis, the trade deficit is likely to reach a massive USD 11,000 million this year. Workers’ remittances too, which has been a major source of financing the current account deficit of the balance of payments has recorded only a sluggish increase of 0.9 percent.
In financing the current account deficit in 2018, the government is reported to have so far raised a sizeable USD 3,838 million, of which USD 2,500 million has been from International Sovereign Bonds, USD 1,000 million has been from a China Development Bank Syndicated Loan, and further Forex loans of USD 338 million. But, sadly there has been no noticeable foreign direct investment this year, other than the final tranche of the one-off sales proceeds relating to the alienation of the Hambantota Port to China. Incidentally, the debt incurred by Sri Lanka for the construction of the Hambantota Port was USD 1,322 million (or about LKR 158 billion), and such Debt was only about 2.1% of the Total Debt of Sri Lanka as at the end of 2014. Hence, by no stretch of imagination could it also be claimed that the Sri Lankan government was in a "Debt Trap" due to the Hambantota Port loan.