The Foreign Debt Crisis Of The ‘Yahapalana’ Government
Mahinda Rajapaksa
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.
