Of life after debt; traps and wisdom

Time was when Ceylon had no debt. And the ‘$hylocks’ of that world had little interest in affluent Ceylon to capture pounds of flesh.

But times and tides have changed. As Shakespeare’s Polonius had advised his son

Neither a borrower nor a lender is;

for loan oft loses both itself and friend,

and borrowing dulls the edge of husbandry.

Meanwhile as time passed, recourse to borrowing was inevitable. To take the Shakespearean analogy further, Shylock had laid down the condition that he wanted Antonio’s pound of flesh should there be a default for monies lent. And when indeed there was default, the knife was sharpened for a pound of flesh. But as the Counselor Portia pleaded, it had to come from near Antonio’s heart; but without the shedding of any blood! By this, the possible was made impossible. And so for both Antonio, the honourable debtor, and for Shylock, the mercenary creditor, it was a ‘trap’ they had fallen into.

Many analysts, in today’s context, talk about a “debt trap”. But is there such a contraption? Is our country in such a situation? And if so, is there life after debt?

One submits, there is life after debt depending on how one gets about it.

There could be a debt problem if we do not handle our economy well. The chances are much better if we can address the debt problem as conceived today by charting a course towards a path of prosperity with appropriate levels and types of debt when used wisely.

When debt is used to invest in essential and economically viable infrastructure and services, they can be repaid without a problem due to high economic and financial returns. The key is that investments should be made wisely and cost-effectively. But wisdom, as we have seen in our time, is a rare commodity.

Nonetheless, Sri Lanka has an impeccable record of debt management. We have never defaulted on a foreign loan. To be sure we did need to borrow at times to keep our servicing of the debt current; and it always ended up with full repayment and unaltered terms. So today when analysts talk about a ‘debt trap’, they should heed our background.

We have around 76% debt to GDP ratio that is not too difficult to handle. But that is if we borrow sustainable amounts and on good terms, invest in high return activities, especially on the tradable sectors. We then have the power and ability to maintain our unblemished record, conscious that we do not have to pay the fully amount of debt in the short term. Much depends on the debt profile.

Our short-term debt issue arises due to three reasons. We had borrowed large amounts in the last decade, mostly to create infrastructure, some of which could not bring sufficient returns; to finance the war; and invest in the non-tradable sector. As such we could not generate a tradable surplus for repayment.

During the Rajapaksa Regime, we saw massive and impressive expansions of infrastructure but with equally massive borrowings especially from ‘friendly’ China. One may ask: at what cost? And that cost, its speculated, was padded with gravy.

Mega infrastructure projects such as expressways, bridges and roads and ports and stadiums are (ill) reputed, especially in developing countries, to be heavily burdened with mega-pounds of Shylokian pounds of flesh. Although appealing to the eye of the voting public, they carry the unbearable burden of dollar debt (Picture). Economic sustainability to service the debt will require the drawing of mega-gallons of ‘Shylockian’ blood from the very heart of the country’s coffers.

We can of course spend all our time and political capital mourning about the past, as indeed we have sadly seen with the present regime. They have spent all their time and political capital for full two plus years looking into the rear view mirror, criticising and doing little to add more essential infrastructure and services and correct the past ills with tangible progress; taking care that the padding and other financial lures that go with mega projects are addressed with needed integrity.

Meanwhile due to the policy stance in the last decade our exports have fallen in volume and value and have become only a third of our imports. Also, the Government at that time did not want to borrow from the multilateral financial institutions despite their better terms. Project preparation, competitive bidding and tight financial monitoring were considered too intrusive!

Our debt problem will come into sharper relief in the next three years: 2018, 2019 and a part of 2020. During these three years there will be a bunching of debt payments. This can be handled in three ways. Create a sound macroeconomic policy stance by bringing the fiscal deficit down, keep the exchange rate competitive, undertake incentive reforms that give better returns to investment and a greater proportion to the tradable sector namely exports and import substitutes sectors. Finally, restructure debt in our favour. A challenging task that calls for courage and statesmanship.

Other supportive policies would be promoting higher Foreign Direct Investment. Get greater access for our exports in foreign markets (e.g. get the GSP plus access to the European Union re-inserted); consider a rollover of some part of the debt. Public sector and public enterprise reform is key as is the monitoring of public borrowing and private sector foreign borrowing.

While one is tempted to advocate that resorting to more mega borrowing is not recommended in the face of the ominous debt overhang, one is reminded, by force of circumstance, of Michael Corleone in Godfather Part III: “just when I thought I was out; they pull me back in!”

Wisdom needs to be the overall determinant of the way forward.

(The writer can be reached by e-mail: [email protected])

Time was when Ceylon had no debt. And the ‘$hylocks’ of that world had little interest in affluent Ceylon to capture pounds of flesh. But times and tides have changed. As Shakespeare’s Polonius had advised his son Neither a borrower nor a lender is; for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry. Meanwhile as time passed, recourse to borrowing was inevitable. To take the Shakespearean analogy further, Shylock had laid down the condition that he wanted Antonio’s pound of flesh should there be a default for monies lent. And when indeed there was default, the knife was sharpened for a pound of flesh. But as the Counselor Portia pleaded, it had to come from near Antonio’s heart; but without the shedding of any blood! By this, the possible was made impossible. And so for both Antonio, the honourable debtor, and for Shylock, the mercenary creditor, it was a ‘trap’ they had fallen into. Many analysts, in today’s context, talk about a “debt trap”. But is there such a contraption? Is our country in such a situation? And if so, is there life after debt? One submits, there is life after debt depending on how one gets about it. There could be a debt problem if we do not handle our economy well. The chances are much better if we can address the debt problem as conceived today by charting a course towards a path of prosperity with appropriate levels and types of debt when used wisely. When debt is used to invest in essential and economically viable infrastructure and services, they can be repaid without a problem due to high economic and financial returns. The key is that investments should be made wisely and cost-effectively. But wisdom, as we have seen in our time, is a rare commodity. Nonetheless, Sri Lanka has an impeccable record of debt management. We have never defaulted on a foreign loan. To be sure we did need to borrow at times to keep our servicing of the debt current; and it always ended up with full repayment and unaltered terms. So today when analysts talk about a ‘debt trap’, they should heed our background. We have around 76% debt to GDP ratio that is not too difficult to handle. But that is if we borrow sustainable amounts and on good terms, invest in high return activities, especially on the tradable sectors. We then have the power and ability to maintain our unblemished record, conscious that we do not have to pay the fully amount of debt in the short term. Much depends on the debt profile. Our short-term debt issue arises due to three reasons. We had borrowed large amounts in the last decade, mostly to create infrastructure, some of which could not bring sufficient returns; to finance the war; and invest in the non-tradable sector. As such we could not generate a tradable surplus for repayment. During the Rajapaksa Regime, we saw massive and impressive expansions of infrastructure but with equally massive borrowings especially from ‘friendly’ China. One may ask: at what cost? And that cost, its speculated, was padded with gravy. Mega infrastructure projects such as expressways, bridges and roads and ports and stadiums are (ill) reputed, especially in developing countries, to be heavily burdened with mega-pounds of Shylokian pounds of flesh. Although appealing to the eye of the voting public, they carry the unbearable burden of dollar debt (Picture). Economic sustainability to service the debt will require the drawing of mega-gallons of ‘Shylockian’ blood from the very heart of the country’s coffers. We can of course spend all our time and political capital mourning about the past, as indeed we have sadly seen with the present regime. They have spent all their time and political capital for full two plus years looking into the rear view mirror, criticising and doing little to add more essential infrastructure and services and correct the past ills with tangible progress; taking care that the padding and other financial lures that go with mega projects are addressed with needed integrity. Meanwhile due to the policy stance in the last decade our exports have fallen in volume and value and have become only a third of our imports. Also, the Government at that time did not want to borrow from the multilateral financial institutions despite their better terms. Project preparation, competitive bidding and tight financial monitoring were considered too intrusive! Our debt problem will come into sharper relief in the next three years: 2018, 2019 and a part of 2020. During these three years there will be a bunching of debt payments. This can be handled in three ways. Create a sound macroeconomic policy stance by bringing the fiscal deficit down, keep the exchange rate competitive, undertake incentive reforms that give better returns to investment and a greater proportion to the tradable sector namely exports and import substitutes sectors. Finally, restructure debt in our favour. A challenging task that calls for courage and statesmanship. Other supportive policies would be promoting higher Foreign Direct Investment. Get greater access for our exports in foreign markets (e.g. get the GSP plus access to the European Union re-inserted); consider a rollover of some part of the debt. Public sector and public enterprise reform is key as is the monitoring of public borrowing and private sector foreign borrowing. While one is tempted to advocate that resorting to more mega borrowing is not recommended in the face of the ominous debt overhang, one is reminded, by force of circumstance, of Michael Corleone in Godfather Part III: “just when I thought I was out; they pull me back in!” Wisdom needs to be the overall determinant of the way forward. (The writer can be reached by e-mail: [email protected])