Comment:

Debt management

There seems to be many misconceptions about the state of the Sri Lankan economy.

One of these is that Sri Lanka has a very high debt burden unparalleled anywhere else in the world. There is no country that is entirely free from debt - to other countries, international agencies and to their own public. There are varying degrees as far as the quantum of debt is concerned.

It was revealed on Friday that Sri Lanka's total outstanding debt stock as a percentage of Gross Domestic Product (GDP), declined to 81.1 percent in 2008 from 85 percent in 2007.

Superintendent of Public Debt, Central Bank of Sri Lanka C. J. P Siriwardene has said most Debt Burden Indicators (DBI) have shown that Sri Lanka is a low debt burden country. In plain words, this means that we were less indebted in 2008 than we were in 2007.

The actual gross borrowings of Rs. 689 billion in 2008 were within the Parliament approved annual borrowing limit of Rs. 708 billion.

The total borrowing from domestic and external sources amounted to Rs. 559 billion and Rs. 130 billion last year. The total outstanding debt stock increased by Rs. 536 billion and stood at Rs. 3,578 billion as at end 2008.

The total interest cost on public debt last year was Rs. 212 billion. The interest cost of domestic and foreign debt amounted to Rs. 182 billion and Rs. 30 billion in 2008. In terms of GDP, the interest cost of the Government budget declined to 4.8 percent in 2008, from 5.1 percent in 2007.

According to the Budget 2009, the total gross borrowing limit of the Government for 2009, in terms of book value, amounts to Rs. 840 billion.

The bottom line is that Sri Lanka has never been in default in debt repayments and the country has maintained a good track record in managing debt.

Sri Lanka has thus won the trust of donor countries and lending agencies as a non-defaulting, low-borrowing country. What is even more remarkable is that these achievements have been made in a very challenging environment caused by a worldwide economic slump.

The economic crisis hit many of the developed countries - the donors - very hard, which made them curtail lending activity. The world also witnessed high oil prices and other adverse factors also came into play.

A deviation from the original borrowing plan was expected and necessitated as a result of these developments. The monetary authorities had to rely more on domestic funding. This was a blessing in disguise in a way as the country eventually has to reduce its reliance on foreign funding, which can in turn reduce the external debt burden.

Other new strategies for raising funds such as pre-funding , forward funding agreements, issuing instruments with odd maturities and reducing auction size were also implemented with success.

Foreign funding and expertise will still be required for several mega projects in the offing. However, there is a possibility that more funds would be available locally for development once the defence expenditure decreases following the imminent elimination of terrorism.

Donors have expressed concern that the rate of utilization of foreign aid is very low in Sri Lanka. Many of Sri Lanka's SAARC neighbours have better rates of aid and loan utilization. There have been many instances where the donors have recalled funds as no use had been made of them.

It would indeed be a waste of local funds if repayments and interest payments have to be made without first making use of the original funding. The authorities have to look into this aspect seriously to expedite development.

The authorities also should be commended for not bowing to unreasonable demands of certain lending countries and organizations.

There have been many attempts to link non-relevant issues to the granting of loans.

It is also not unreasonable to request users to pay for the usage of certain infrastructure facilities (such as expressways) built using foreign loans so that the direct effect on the Treasury is somewhat mitigated.

Sri Lanka should move towards becoming less dependent on debt, external and internal.

One approach is broadening the direct tax base and streamlining other revenue generation streams.

Sri Lanka's economy has proved its resilience in the worst economic crisis since the Great Depression and this goal should be well within its reach.