Monday, 17 April 2017
In a recent full page advertisement published in some newspapers, the Chamber of Young Entrepreneurs of Sri Lanka (COYEL) has made reservations on the Hambantota Port lease arrangement and had suggested a way forward without resorting to selling of national assets to a foreign party.
The advertisement covers a plethora of issues starting from the debt situation in the country, the 99 year lease, repayment of debt, and a possible alternative way forward. Below it is shown that the article is based on inaccuracies and misrepresentation of facts. A few of the glaring misrepresentations are highlighted below.
The advertisement covers a plethora of issues starting from the debt situation in the country, the 99 year lease, repayment of debt, and a possible alternative way forward. Below it is shown that the article is based on inaccuracies and misrepresentation of facts. A few of the glaring misrepresentations are highlighted below.
Is Sri Lanka caught in a debt trap?
Sri Lanka is certainly facing a debt crisis where it is finding it difficult to repay its maturing debt and the related interests. It may not be in a debt trap yet but it is close to one and remains a highly indebted nation. IMF ‘Heat Map’ analysis indicates a high risk to debt sustainability in Sri Lanka.
If the National Debt per GDP is used as an indicator, the analysis cannot be done by a simple cross country comparison. Sri Lanka has many hidden debts associated with borrowings of government institutions like the Road Development Authority (RDA), National School of Business Management (NSBM), Kotalawela Defence Academy (KDU), etc., which are not reflected in official national debt published by the Government of Sri Lanka and international data bases. If such debts are incorporated, Sri Lanka’s national debt per GDP in 2015 would have been 101% and would have ranked among the first 12 countries in the Table produced by COYEL.
The point to note however is that National Debt to GDP is a poor indicator to measure the debt burden of the country. First, the national debt ratio goes up due to recession and austerity programmes. This has happened in many developed countries due to the slow growth of the GDP. For example, (i) Japan’s stagnation after its rapid growth in the 1980s resulted in Japan experiencing a national debt ratio above 200% for more than a decade, and (ii) since 2007 global economic recession, US national debt ratio has increased significantly but most increase has been due to slow growth in the GDP, not because of the hugely increasing debt.
Second, what matters is the composition of national debt, especially the size of the external debt in overall debt. Debt default goes up when a country borrows from other country’s currencies. Most developed countries have the bulk of their debt in their local currencies. The bulk of the Japanese debt is domestic debt (its own currency) in which it has more control over. The bulk of the US debt is in US dollars. Thus, Japan’s 229% per GDP debt and US 104% per GDP do not indicate a debt crisis in these countries. In fact, rating agencies have not downgraded Japan and the country is borrowing in the international capital markets at the least favourable interest rates in the world.
In Sri Lanka, total external debt as a percentage of GDP has increased from 42.4% in 2006 to 55.1% in 2015. Moreover, the share of non-concessional borrowing in external debt has increased from 7% in 2006 to above 50% after 2013. With sovereign rating going down with more external indebtedness, borrowing has become costlier for debt repayments. In 2016, Sri Lanka had to pay $ 4.7 billion on foreign debt, when an import-dependent economy like Sri Lanka needs $ 4 billion every three months to keep the economy moving. Sri Lanka’s current foreign reserves are just over $ 5 billion, when it should be around $ 7.5 to 8.5 billion to be in a comfort zone. This is why Sri Lanka has a debt burden and needs to find various means of reducing the burden of repayment of the debt without imposing hardships on the people in the form of higher taxes or as a more depreciated currency.
Thus, using a Google download chart and saying that Sri Lanka has no debt repaying problem is unprofessional and amateurish to say the least.
If the National Debt per GDP is used as an indicator, the analysis cannot be done by a simple cross country comparison. Sri Lanka has many hidden debts associated with borrowings of government institutions like the Road Development Authority (RDA), National School of Business Management (NSBM), Kotalawela Defence Academy (KDU), etc., which are not reflected in official national debt published by the Government of Sri Lanka and international data bases. If such debts are incorporated, Sri Lanka’s national debt per GDP in 2015 would have been 101% and would have ranked among the first 12 countries in the Table produced by COYEL.
The point to note however is that National Debt to GDP is a poor indicator to measure the debt burden of the country. First, the national debt ratio goes up due to recession and austerity programmes. This has happened in many developed countries due to the slow growth of the GDP. For example, (i) Japan’s stagnation after its rapid growth in the 1980s resulted in Japan experiencing a national debt ratio above 200% for more than a decade, and (ii) since 2007 global economic recession, US national debt ratio has increased significantly but most increase has been due to slow growth in the GDP, not because of the hugely increasing debt.
Second, what matters is the composition of national debt, especially the size of the external debt in overall debt. Debt default goes up when a country borrows from other country’s currencies. Most developed countries have the bulk of their debt in their local currencies. The bulk of the Japanese debt is domestic debt (its own currency) in which it has more control over. The bulk of the US debt is in US dollars. Thus, Japan’s 229% per GDP debt and US 104% per GDP do not indicate a debt crisis in these countries. In fact, rating agencies have not downgraded Japan and the country is borrowing in the international capital markets at the least favourable interest rates in the world.
In Sri Lanka, total external debt as a percentage of GDP has increased from 42.4% in 2006 to 55.1% in 2015. Moreover, the share of non-concessional borrowing in external debt has increased from 7% in 2006 to above 50% after 2013. With sovereign rating going down with more external indebtedness, borrowing has become costlier for debt repayments. In 2016, Sri Lanka had to pay $ 4.7 billion on foreign debt, when an import-dependent economy like Sri Lanka needs $ 4 billion every three months to keep the economy moving. Sri Lanka’s current foreign reserves are just over $ 5 billion, when it should be around $ 7.5 to 8.5 billion to be in a comfort zone. This is why Sri Lanka has a debt burden and needs to find various means of reducing the burden of repayment of the debt without imposing hardships on the people in the form of higher taxes or as a more depreciated currency.
Thus, using a Google download chart and saying that Sri Lanka has no debt repaying problem is unprofessional and amateurish to say the least.
Leasing of Hambantota
Port to China
Sri Lanka’s annual repayments on debts exceed $ 4 billion and this will be the case in 2017 and also in 2018. From 2019 to 2022, the average annual debt payments will be far higher than $ 4 billion as bullet payments for maturing sovereign debt of $ 1.5 billion in 2019 and $ 1 billion for each year from 2020 to 2022, will add up to other projects and borrowing related debt repayments. From exchange rate management perspective, what matters is the overall amount of debt repayment. This is because when huge amount of foreign exchange flows out in the form of debt repayments, it put pressure on the exchange rate to depreciate if there are no offsetting capital inflows. Sri Lanka is currently in a situation where there is more foreign capital outflow than inflow. This puts pressure on the exchange rate to depreciate and makes future debt repayment more costly.By the Hambantota deal, Sri Lanka is not only avoiding annual debt repayments on the said project but also gaining a large one-off capital inflow of $ 1.1 billion. This will facilitate to maintain exchange rate stability at a time when there are tendencies for more capital outflows (US rate hike, etc.) It is on this basis that the package has been worked out with Sri Lanka owning 20% shares of the Hambantota Port leased out to the Chinese on a 99 year contract.
The deal has been worked out for Sri Lanka to purchase another 25% shares in the next 10 years to increase Sri Lanka’s share holding to 45%. In any case, the share split is still under discussion and no figure has been arrived at in regard to the exact split. But here again there is a need to estimate the annual lease income and debt repayments accurately. For instance, in the COYEL statement, the annual lease income has been estimated without due consideration to the time value of money (http://www.ft.lk/article/608374/Analysis-of-criticism-against-the-proposed-PPP-at-Hambantota-Port ).
The writer does not have access to yearly repayment of interests on the Hambantota Port project to double check their accuracy; however it needs to be highlighted that the COYEL treats debt repayment from the project perspective and not from the overall Sri Lankan economy perspective, which is not sensible from the overall economic management perspective.
Leaving aside the debt repayment problem, let us now focus on the lease arrangement. It is vital to look at the lease arrangement from a strategic perspective. As well known, port operations are highly specialised tasks and only a reputed port operator will be able to attract more cargo to a port. Just because many ships pass close to Hambantota, or in the future, ship transport near Hambantota increases after the Kra Canal is opened, does not mean that the Hambantota Port will thrive with business. If so, there would have been signs already of such increasing traffic at this port. With hardly any business, if Hambantota is to reap its potential, a credible port operator should manage the port and attract ships from the nearby sea lanes. Given China’s involvement in constructing the port, the Government of Sri Lanka may have felt that it is best that a reputed company from China manages the port under the conditions stipulated.
There is then reference in the COYEL advertisement to the 99 year lease arrangement. Working out a 99 lease for a foreign company is not a new phenomenon in Sri Lanka. During the previous regime, Shangri-la Hotel land was given on a freehold (full ownership) basis to the Singaporean foreign company, and 30 hectares of the Colombo Port City was given to the Chinese company again on a freehold basis. The land where Altair Towers is located near Beiralake was given on a 99 year lease to Indocean Company of India, and so on.
At that time, there was not a word of protest or caution from COYEL on the sale of national assets on free hold or 99 year lease basis. At least now, on the renegotiated deal on the Colombo Port City, a 99 year lease was granted in the same land area, thus preventing ownership of land to China. Countries like Cambodia, Thailand, and above all Cuba have granted land to foreign companies on a 99 year lease agreements and none of them have encountered threats to national security. Thus raising alarm bells now and being silent in the past does not augur well for a Chamber that calls itself as a protector of national assets.
At another point, it is said that $ 96 million could be saved from import of fuels, motor vehicles and wheat. Sri Lanka has a market economy and not a one advocated by COYLE with controls and restrictions to curtail imports by restrictive measures. In a market economy, due consideration needs to be given to market demand and any curtailing of imports needs to done via market instruments such as interest rates, exchange rates, taxes, and tariffs. The government has done the maximum effort in these areas but still there is demand for these products which cannot be curtailed by further adjusting these instruments to take the regime to austerity, as it is not in line with the Government’s stated policy.
In all likelihood, this newspaper advertisement seems to be based on the line of argument of an individual member or a group of members in the said Chamber. A professional Chamber like COYEL needs to get such submissions made by an individual member or a group of members who have their own separate political agendas checked and verified by experts, before publishing in newspapers. If not, the Chamber will be publishing a document with too many inaccuracies and questionable analysis and will be clearly identified by the public as one that promotes a political agenda of few individuals.
(The writer is a Financial Analyst)
