‘New Loans for Old’: Sri Lanka’s Spiralling External Debt

30 August 2012 by B. Skanthakumar

Sri Lanka’s foreign debt doubled between 2000 and 2012 and is now more than USD18 billion or LKR2375 billion (US$1=Rs132). In comparison, Sri Lanka’s total economic output (gross domestic product GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
) in 2011 was under USD60 billion.

As the amount of Sri Lanka’s borrowings from abroad increases, so does the amount of foreign earnings that must be spent to service this debt: almost USD1 billion in 2011 alone, which is the same as the inflow of foreign direct investment in that year.

Most borrowings in recent years have been at non-concessional rates, that is, the rate of interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. is at market-level or even higher and the repayments periods are relatively short.

China is now Sri Lanka’s largest bilateral (country to country) creditor, having displaced Japan. Sri Lanka has borrowed around USD2.96 billion from China since 1997. However, because of interest payments, it now owes China around USD4.9 billion, which has to be repaid on average within 12 years from date of borrowing.

Although China has funded many projects in Sri Lanka since the 1970s, these took the form of grants rather than loans. However, since 2006 when Mahinda Rajapakse took office, China has been the source of loans for major infrastructure projects such as the Colombo-Katunayake expressway, Magumpura Port, Mattala international airport, Norochcholai coal power plant and much else.

Another enthusiast for funding large-scale infrastructure projects is the Asian Development Bank (ADB); which is Sri Lanka’s largest multilateral (inter-governmental institution) lender. The ADB has loaned around USD3353 billion but once interest payments are added, Sri Lanka will have to repay over USD4642 billion.

A third source of Sri Lanka’s borrowings – other than bilateral and multilateral creditors – is the international money markets where private institutions invest in government (or “sovereign”) bonds which the government has to buy back on a fixed date and at a fixed amount which includes interest.

Since 2007, the government of Sri Lanka has sold five sovereign bonds (most recently in July 2012) which garnered around USD4 billion for the Treasury. The sovereign bonds have been very popular because the rate of interest offered by the government is much higher than that offered by commercial banks.

The funds raised through sovereign bonds have been used to finance more infrastructure projects, but also to service earlier loans. In other words, Sri Lanka is taking new loans to repay old loans.
Having recently received the final instalment of the USD2.6 billion borrowed from the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

(IMF) in a ‘Stand-By Arrangement’ in 2009, the government is currently negotiating for a further USD500 million (under an ‘Extended Fund Facility’) – even before it has begun to repay the earlier loan. This is on top of the USD2 billion that the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

is lending Sri Lanka over the next four years.

To satisfy IMF conditionalities, the government has carried out several neo-liberal measures including devaluation Devaluation A lowering of the exchange rate of one currency as regards others. of the rupee by over 16 percent since November 2011 alone; increases in price of petrol and kerosene; and sharp hikes in electricity tariffs for household users.
Even the Fund admits that consequently the rate of inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. will spike at 9.5% this year. Sri Lanka’s imports have increased while earnings from exports have decreased, widening the balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. crisis that drove it to the Washington D.C. based-institution in the first place. However, the IMF remains unrepentant: “The right policies have been implemented and the fundamentals of the economy have been set on a more sustainable footing”.

While it is governments who borrow, it becomes the responsibility of the country and its people to repay the debt, and that too over several generations. Meanwhile, the costs of external debt are experienced in running down scarce foreign exchange reserves, and in redirecting the island’s revenues from spending on public goods such as education, health and housing, and on job-creation and poverty-eradication, towards servicing the spiralling debt.

B. Skanthakumar, Economic, Social & Cultural Rights programme, Law & Society Trust (LST), No. 3, Kynsey Terrace, Borella, Colombo 08, Sri Lanka, T: +94 11 26 84 845 / 26 91 228 / 26 84 853, F: +94 11 26 86 843, E: lst.kumar at gmail.com, W: www.lawandsocietytrust.org

Other articles in English by B. Skanthakumar (4)



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