Tackling SL debt crisis:

Call for more private sector investment

by Lalin Fernandopulle

Correcting the macro-economic fundamentals is essential for the government to boost revenue in the coming year to service its debt, say economists.

Economists said the total debt of Sri Lanka is on the rise. External Debt increased to Rs.3, 671,100 million in June from Rs.3, 584,617 million in May of 2016. Weaker government revenue, delay in expected foreign investments, widening external trade deficit are the reasons for the government to increase borrowing.

Central Bank sources said, the government has taken measures to introduce macro economic reforms and the Prime Minister is expected to make an economic policy statement soon.

Ceylon Chamber of Commerce, Chief Economist Anushka Wijesinha said, it is certainly a challenging and precarious debt situation. "Economic growth has slowed, exports have been declining, tax revenue is not keeping pace with budgetary needs, we have a relatively large public sector, and public spending is continually rising.

To service our debts, the economy has to grow. If growth doesn't pick up, we would likely be in a debt crisis by the end of the decade.

"In the short term - we need to re-assess the debt situation to see what can be restructured, what expensive debt can be retired and alternative funding sought.

In the short term, the government would need to go through expenditure items line by line with a fine tooth comb to see if we are getting back for our back on public spending, what loopholes need to be plugged, what expenditures need to be rationalized, what public programs aren't delivering and are a waste of public money.

Cost benefit

Alongside this, there needs to be a keen focus on tax reforms - to expand the base, get clever at catching evasion (through smarter audits and greater use of revenue intelligence and IT), improving compliance, facilitating business without harming revenue needs or the investment climate," he said.

"Medium-term - it's important to put in place mechanisms to ensure Sri Lanka doesn't invest in under performing public projects in the future. Projects that are financed by public money - either current or future (borrowed) money must pass strict cost benefit and feasibility tests. Procurement procedures need to be strengthened to ensure best value for money. And most importantly, we must do more projects with private investment, and move away from the over reliance on publicly funded projects. There is plenty of evidence around the world on how PPPs have helped bring down project costs, bring in efficiency, and provide good value for money, if done right. Getting out of the debt situation necessarily means not adding on more and more debt when projects can be done with private sector investment.

Medium-term to long-term - The key in the medium to long term is to get the economy growing rapidly and for a sustained period. With growth comes fiscal revenues, and sustaining higher debt levels can be managed in a high growth environment. If growth doesn't pick up, there may be pressure to provide fiscal stimulus to the economy, which is not sustainable. If growth doesn't pick up, tax revenues will also suffer. Ultimately, growth matters. This is where we also need to focus on exports and FDI, to give a boost to growth.

Senior Professor of Economics, University of Colombo, Sirimal Abeyratne said, the government is left with only limited short-term options for next year; as it is already looking for these options, they are related to raising tax revenue and containing budget expenditure. Apart from that, further borrowing is another option, while, re-negotiation of at least some of the loans too can be considered. Government may also consider selling some of its real assets not only for debt-servicing but also for encouraging private investment. However, most of these are essentially short-term and perhaps damaging too. Therefore, it is absolutely necessary to look for long-term measures in achieving fiscal consolidation on the one hand, and generating investment, expanding exports and achieving growth momentum on the other. If short-term measures are not accompanied by long-term measures, the next year debt service problem could be worse than what it was this year.

Apparel exports

Secretary General Joint Apparel Association Forum M P T Cooray said, this year's projections on apparel export income are that it will sustain the export income level achieved in 2015, the reason being that our major markets are experiencing a recession.

Export income from apparels from January to July last year was US$ 2,704.7 million.

In respect of 2017, no specific projections have been made. However, if GSP+ is restored, China Sri Lanka FTA signed with market access for apparel products (included as a major request), and the Indian market opened up under the Early Harvest program of ETCA, we believe an additional annual export turnover of US$ 700 million could be achieved.

The real economic challenges faced by the government are highlighted in the IMF country report issued in June this year. IMF approved US$ 1.5 billion Extended Fund Facility (EFF) to support the government at increasingly difficult external environment and challenging policy adjustments.

The IMF report highlighted the macroeconomic challenges faced by the government.

"The government fiscal deficit expanded to 6.9 percent of GDP in 2015. While revenue increased by 1.5 percentage points to 13.1 percent of GDP, this mostly reflected one-off measures and tax collections from a temporary surge in vehicle imports. Expenditures rose by 2.1 percentage points to 19.9 percent of GDP, on account of a post-election wage hike, a higher interest bill, additional spending on goods and services, and an increase in income transfer programs. The overall balance of payments deteriorated significantly in 2015 despite an improvement in the terms of trade.

The current account deficit was contained at 2.5 percent of GDP in 2015-the same level as in 2014. Capital flows have also been a key driving force behind the deterioration in the balance of payments.

The capital and financial account position has weakened due to foreign exit from government securities, lower FDI inflows, and slow implementation of externally financed public and private projects. Investor sentiment has worsened, reflecting global market volatility and concern over domestic policies.

Tougher external conditions in the wake of China rebalancing and unwinding of unconventional monetary policies were not outside Sri Lanka's past experience. However, spillovers were magnified by domestic imbalances, as evidenced by higher volatility around the two elections (January and August 2015), and the official budget passed in November 2015.

The rupee continues to face downward pressure-largely reflecting capital flow developments. The foreign exchange and government bond markets were volatile in March 2016 highlighting rigidities in both systems."

"So, it is clear that debt is not an isolated issue and it cannot be corrected without adjusting above macroeconomic fundamentals to positive," an economic analyst said.

He said, the government is seeking concessionary loans from donor agencies and friendly nations.

However, the main support will be from the IMF and this EFF program will support the government to achieve its goals. The program proposed following measures.

For revenue collection the government will have to depend more on indirect taxes. Crisis in the Middle East will reduce foreign remittance causing BOP issues.

Possible crude oil price increase as a result of OPEC decision to cut production will also widen external deficit. All these factors are pushing the government to borrow more.