Sri Lanka: Debt Trap and Mega Development

14 August 2018 by Ahilan Kadirgamar

Sri Lanka’s foreign debt is again talk of the town. Is the country overly indebted to China? Are we borrowing too much from international capital markets? Or are we financing ourselves into trouble with multi-lateral agencies like the International Monetary Fund (IMF), World Bank (WB) and Asian Development Bank (ADB)? And how do we assess the role of foreign financing for economic development?

Economic growth and prosperity requires investment. And investment can either be funded through savings or borrowings. Investment may come from household savings in banks or taxes that are not used for recurrent state expenditure. If households do not save enough and the Government does not tax enough, then external borrowings must fund investment to increase production and employment. To avoid a foreign debt trap, the Government should impose adequate levels of taxation or, alternatively, ensure it is in a position to borrow from domestic private savings to finance national plans and related investment.

At present, this story is complicated by past foreign loans that remain unsettled, which also require more foreign borrowings to make principal and 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. payments. This is the debt trap that is worrying the country at the moment. How does the Government roll over past foreign loans? Is it by borrowing from international capital markets in the forms of sovereign bonds? Or bilateral donors such as China, Japan and India? Or multi-lateral agencies such as IMF 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.
, WB 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.

and ADB?

China or capital markets

Sri Lanka’s accumulated external debt stock Debt stock The total amount of debt was at US$ 28.7 billion at the end of 2017, where market borrowings mainly of sovereign bonds accounted for 39%, and loans owed to ADB 14%, Japan 12%, WB 11%, China 10% and India 3%. In addition, many loan agreements in the form of Official Development Assistance ODA
Official Development Assistance
Official Development Assistance is the name given to loans granted in financially favourable conditions by the public bodies of the industrialized countries. A loan has only to be agreed at a lower rate of interest than going market rates (a concessionary loan) to be considered as aid, even if it is then repaid to the last cent by the borrowing country. Tied bilateral loans (which oblige the borrowing country to buy products or services from the lending country) and debt cancellation are also counted as part of ODA. Apart from food aid, there are three main ways of using these funds: rural development, infrastructures and non-project aid (financing budget deficits or the balance of payments). The latter increases continually. This aid is made “conditional” upon reduction of the public deficit, privatization, environmental “good behaviour”, care of the very poor, democratization, etc. These conditions are laid down by the main governments of the North, the World Bank and the IMF. The aid goes through three channels: multilateral aid, bilateral aid and the NGOs.
have been made over the last five years with disbursements yet to be made for a total of US$ 9 billion. Of these undisbursed loans by bilateral and multilateral donors, and this does not include market borrowings that are not agreed to in advance, China leads the pack with 22%, followed by Japan and ADB with 19%, WB with 13% and India with 6% (Finance Ministry Annual Report 2017).

It is easy to point fingers at regional powers that have contributed to Sri Lanka’s foreign debt problems, whether China, Japan or India. However, as I have previously argued, the biggest culprit is borrowings from global finance capital or the seemingly innocent international capital markets, which charge much higher interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.

As evident from repeated financial crises over the last few decades – most recently in Southern Europe – the consequences of international market borrowings can be devastating. And yet, IMF, WB and ADB, want Sri Lanka to open its capital markets to global finance capital, which comes with the dangers of capital inflow and flight causing crises. IMF uses the stick of the Extended Fund Facility Agreement of 2016 towards that end, while ADB and WB use the carrot of hundreds of millions of US dollars in development assistance to expand capital markets—most recently, ADB’s Capital Market Development Programme (US$ 250 million) and WB’s Financial Sector Modernization Project (US$ 75 million).

While the data above speaks for itself, why is it that there is so little discussion of Sri Lanka’s market borrowings characterized by sovereign bonds? Is it because we like to believe we are at the centre of the world with China, India and the US fighting over us? Or have we fallen for the bias of Western and regional media, which paint Sri Lanka as a pit stop in the geopolitical game, and overlook the devastation that comes with neoliberal integration of capital markets.

Funding for development

If mega development and trophy projects under the Rajapaksa regime pushed Sri Lanka deeper into a debt trap of foreign loans, the current Government is digging itself deeper by seeking mega development projects with international financing to increase GDP 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.
growth and shore up its external finances in the short-term. Here again, Chinese funded projects such as the Port City have been in the limelight, but projects by multi-lateral agencies face little scrutiny.

The ADB funded Northern Province Sustainable Fisheries Development Project is estimated at US$ 174 million, with over a third of that amount being spent on the Point Pedro Harbour. Compare this with the Budget 2018 allocation of Rs. 150 million (less than US$ 1 million) to rebuild the Myliddy fishery harbour, currently underway in northern Jaffna. The Myliddy harbour is also more appropriate for the small scale fishing community in the North, rather than the Point Pedro harbour meant for large deep sea fishing vessels. Even more striking is that the ADB “project design advance” for consultants is US$ 1.59 million of which US$ 0.29 million comes from the Government. In other words, the consultancy fees for an internationally financed fishery project is higher than the total allocation for a national project to rebuild a major fisheries harbour, exemplifying the gravy train of funds for international consultants, perks for local officials and windfall profits for contractors involved in internationally financed development projects.

A second example is the ADB water project for Jaffna, running into hundreds of millions of US dollars. An “interim solution,” on the order of US$ 80 million is required for a desalination plant to be built on the eastern coast of Jaffna to supply desalinated sea water at many times the cost of supplying river or tank water from the mainland to parts of the peninsula.

The sad reality, according to many in Jaffna, is that we let rain water run into the sea and then use reverse osmosis to convert sea water into fresh water. Perhaps we have ambitions of becoming Saudi Arabia or Israel, but neither do we live in a desert nor are we that wealthy! Crazy as these development projects may sound, they are increasingly the norm in many debt-ridden countries at the mercy of multi-lateral agencies.

Source: Daily Mirror

Other articles in English by Ahilan Kadirgamar (10)



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