Ceylon Today Editorial

Debt Trap

18 May 2017

According to Central Bank of Sri Lanka's (CBSL's) last year's annual report, released recently, the rupee value of the Government of Sri Lanka's (GoSL's) foreign debt stock as at end last year stood at Rs 4,045,796 million.

Of this number, what Sri Lanka owes to China amounted to Rs 374,020 million or 9.24% of GoSL's total foreign debt. The Chinese debt stock comprised borrowings direct from Beijing, coupled with borrowings from Export-Import Bank of China (China EximBank) which is also controlled by Beijing.

CBSL said loans taken from China EximBank, Rs 242,416 million, or 6% of GoSL's total debt stock was loans obtained from financial markets. Loans obtained from financial markets are not necessarily concessional, they are generally commercial.

It said of GoSL's total foreign debt stock, Rs 1,897,680 million were concessional loans, Rs 538,859 million (non- concessional) and commercial (Rs 1,609,257 million).

In the segmentalization of foreign debt, CBSL said that Rs 1,076,549 million was multilateral, Rs 945,754 million (bilateral) and Rs 2,023,493 million (financial markets).
CBSL data showed that in 1950, coinciding with the year that CBSL was founded and from which year such data is in the public domain, GoSL's foreign debt then comprised Rs 125 million or 3.2% of GDP, while total debt was 16.9% of GDP.

Since then, over a span of 66 years, foreign debt has risen by Rs 4,045,671 million (3,236,536.8%), its foreign debt to GDP ratio by 968.75% to 34.2%, while total debt as a percentage of GDP had increased by 369.23% to 79.3%.

One way out of the debt trap is the leasing of the Hambantota Port to the Chinese from which GoSL plans to raise $ 1.1 billion (Rs 167.75 billion). Conversions are based on Monday's administered 'spot' price which was Rs 152.50 to the dollar. CBSL deals in 'spot' in local markets.

In US dollar terms, the country's total external debt stock as at last year end stood at US$ 46.6 billion, up from the previous year's (2015) figure of $ 44.8 billion.

Outstanding liabilities of the GoSL's external debt amounted to 58.41% of total external debt last year, compared to 55% in 2015, an increase of 3.41 percentage points (6.2%).

The country's total external debt increased by $ 1.8 billion, last year. Consequently, external debt stock increased from $ 44.8 billion in 2015 to $ 46.6 billion last year.

External borrowings from GoSL increased last year due to the issuance of an international sovereign bond (ISB) and two foreign currency term loan facilities. Recently, GoSL raised another ISB ($ 1.5 billion), which proceeds were expected to hit the market yesterday.

Capital repayments on external debt amounted to $ 3,157 million last year, compared to $ 3,435 million in 2015. CBSL said that interest payments on outstanding external debt obligations increased from $ 1,190 million in 2015 to $ 1,209 million last year.

The increase in interest payments was mainly due to the expansion in interest payments made by the private sector and deposit taking corporations, the Bank said.

Deposit taking corporations included State Banks, which during President Mahinda Rajapaksa/then CBSL Governor Ajith Nivard Cabraal era from November 2005 to 8 January, 2015, were made to proxy- borrow on behalf of GoSL.

'The continued rise in Sri Lanka's external debt remains a concern in the external sector, particularly in view of the expected increase in the cost of borrowing due to a rise in global interest rates,' CBSL said.

CBSL was averring to the fact that whereas interest rates in the world's largest economy, the USA, since the development of the global financial crisis in 2008, remained zero for seven years, resulting in low interest rates globally, that stance has since changed.

With the recovery of the US economy, seven years later, the Federal Reserve System increased its Fed Funds Rate (FFR) by 25 basis points (bps) in December 2015 to be between 25-50 bps, whilst making similar increases twice after that, for the FFR to be currently between 75-100 bps; with another increase expected next month.

When interest rates in the USA rise, those have a knock on effect on global interest rates, making those rates too to increase.

The Bank said that whereas GoSL's total debt stock was equivalent to 79.3% of GDP, that which was foreign comprised 34.2%, an increase of 1.8 percentage points (5.56%) over the previous year 2015 figure of 32.4% of GDP.

CBSL said that GoSL's total outstanding foreign debtincreased by 14.2% year on year to Rs 4,045.8 billion last year due to a combination of borrowings to finance the budget deficit and rupee depreciation.

It however said that in dollar terms, foreign currency denominated debt ended last year at $ 4,019.8 million, down from last year's figure of $ 4,790.1 million.

However, CBSL said that debt servicing payments in Sri Lanka grew at a higher rate than the growth in revenue in the past few decades. Last year, interest payments of the existing debt stock absorbed about 36.2% of total GoSL revenue. Also, 80.2% of total GoSL revenue was absorbed by total debt servicing payments, leaving only a small portion of revenue to be utilized for all other public expenditure programmes last year, it said.

GoSL's debt stock alone, during this period increased from $ 24,681 million to $ 27,197 million. CBSL's debt however declined from $ 2,823 million to $ 2,022 million. Meanwhile, private corporations and state owned business enterprises' debt in the review period increased from $ 5,567 million to $ 5,774 million. Deposit taking corporations however, saw their foreign debt stock, last year over 2015, decline to $ 8,790 million from $ 9,156 million.