17th February 2002

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The Sunday Times Economic Analysis

The vicious debt trap

By the economist
The country is in a debt trap. It is not only the magnitude of the debt incurred but also the manner and purposes for which the debt was incurred, it's self-generative feature and the poor state of the public finances, that make the debt a huge concern. For the first time in the country's history the public debt exceeded the national income. The public debt reached 1414 billion rupees compared with an estimated national income of about Rs. 1225 billion for last year. The national debt per capita is now higher than the per capita income of the country. 

Had this debt been incurred for developmental expenditures our concern would have been limited. Such expenditure would in due course increase output and incomes. The debt burden would have been reduced over time. In fact the debt has been incurred largely to finance the war, to pay salaries of public servants and pensions, welfare measures and the servicing of the debt itself. 

The servicing of the debt is now the largest single item of government expenditure. It absorbs nearly 25 percent of expenditure and about 30 percent of revenue. The debt servicing cost alone is about 6 percent of GDP. The large amount of money spent on the servicing of the debt itself adds to the size of the debt. This is a particularly disconcerting fact. The capacity of the government to bring down the debt is indeed limited owing to government revenue not being even adequate to finance current expenditures. Consequently the recurring budget deficits add to the debt rather than reduce it. 

The other serious implication of the current fiscal situation is that the inadequacy of revenues implies a difficulty to find resources for the much-needed capital expenditures. The curtailment of capital expenditure affects the long-run development of the country. In the past, governments in difficulty have often contained the budget deficit by cutting capital expenditures that were originally allotted in the budget. This has indeed been a very unhealthy aspect of our public finances. This curtailment of capital expenditures by affecting economic growth ultimately and indirectly increases the debt burden. 

The debt trap we are in is with respect to our domestic debt. Many developing countries are in a debt trap owing to their foreign debt. When the foreign debt servicing costs absorb a huge proportion of the annual foreign exchange earnings of a country, then its exports become inadequate for its imports. A cycle of balance of payments difficulties keeps such countries in continuous debt and balance of payments difficulties. Fortunately Sri Lanka is not in a foreign debt trap. 

Although, 45 percent of the public debt is foreign, it absorbed only 12 percent of our export incomes in 2000. It is likely to have absorbed a larger proportion of our export income last year owing to the reduced earnings from exports, perhaps about 15 percent of export incomes. There is only one way by which we can escape from the debt trap. We have to decrease expenditures and increase revenues. That is indeed a trite expression and yet one cannot escape its truth. The problem that the new finance minister has before him is no different to what his predecessors had. There is an enormous difficulty in cutting down expenditures for two reasons. First most huge expenditure items are committed expenditures. There are the salaries and pensions that cannot be reduced, the debt servicing cost remains, the war expenditure can only be reduced to a limited extent till we have a lasting peace. Second, the curtailment of the other item of large expenditure, welfare could be a very contentious item politically. While expenditure on education and health remain inadequate, half of the welfare expenditure or more are for Samurdhi payments and the large net work of staff servicing it. 

Will the government have the courage to trim these expenditures and make this a better-targeted program for the really needy? There is also a need to increase revenue. This is also a rather difficult proposition when the economy is not growing. Higher rates of taxation may not be feasible. Better tax collection may be a more realistic alternative. The government may also have to resort to new taxes that are not a disincentive to investment and enterprise, but cut expenditures. Certainly the country is in a debt trap. Only substantial changes in government expenditure and more effective taxation can relieve the burden. We would have to await the next budget to see whether the government takes a few steps in the right direction to lighten the debt burden.

Thoughts from London

Act against the corrupt before the heavens fall

By Neville de Silva
To be fair to newly installed governments and their leaders, the first 100 days is hardly a time scale by which to measure achievements.

Still for all the media has made this a kind of bench mark by which governments and leaders are judged.

Tangible and positive results cannot be expected in such a short time, particularly if it means undoing the muddles that have been created and the confusion sown by a previous administration.

It is all the more difficult to make a searing impact if the political balance is as delicate as it is now in Sri Lanka. It is the first time that the country has faced such a critical point where the centre of power is still uncertain and can be debated till the proverbial cows come home.

One needs to remember that both the president and the government have been elected by the people, both draw their respective strength from a mandate granted by the people.

Some might argue that since the parliamentary elections followed the presidential election, the later mandate by which the United National Front(UNF) was elected to power supercedes the mandate given at the presidential election.

Others could assert that since the president is both the head of state and government and is also holding office as a result of a people's mandate, presidential power should take precedence over an elected government which only chose its prime minister thereafter.

In short the prime minister is not directly elected whereas the president is.

These arguments and the balance of power in a practical sense are obviously known to Prime Minister Ranil Wickremesinghe, his ministers some of whom are admittedly competent lawyers and the ruling circles.

This bifurcation of power arising from the difference in political alignments residing at President's House and Temple Trees, has caused a situation where a normally cautious politician such as Ranil Wickremesinghe to move even more gingerly than those angels who fear to tread.

Those who expected the UNP leader, after seven years in the wilderness to sweep across like a whirlwind righting wrongs here, sacking political appointees there and generally causing a political storm as opponents ran for cover, must be wondering what has gone awry.

In the estimation of even some of the rank and file of the UNP who had probably been prepared to run amok throwing political opponents in their workplaces down from the barricades, something was rotten in the politics of Sri Lanka.

Over the past three decades or so, it had been the practice of the winning side to boot their opponents to purgatory or wherever and ensure that they remained there.

That was the political culture we have become accustomed to over the years as each of the institutions which had maintained a semblance of neutrality and fairness- the public service, the police, the judiciary and the military- became increasing politicised and served as organs of the government and not the state.

With every election and every change of government this political culture became more and more tainted and corrupted by those who utilised these state organs to perform on their behalf so that they could remain in power in perpetuity.

It would be futile and fruitless to deny that there was no violence after the elections, the victors setting on the vanquished. But it is true to say that post-election violence was far less than was anticipated and more so because the People's Alliance lost the election.

The same people who expected the new government to sweep the past away and begin with a clean slate are wondering why it appears to be moving at snail's pace.

So when the 100 days are upon us, what would the government have to show in terms of achievements? From the standpoint of those who advocate haste, it would have been far better had the government made a clean sweep of things, removing for the positions of power and privilege, those who were obvious stooges and hangers-on of President Chandrika Kumaratunga's administration.

But now there is little to show and criticisms of Ranil Wickremesinghe as the leader of a new government that is afraid of undoing the wrongs of the past, are beginning to surface.

Those who wish to see quick and definitive changes must realise two matters. One is that the balance of power being delicate, it would be foolhardy to rush into things that can be corrected in time. There are somethings that need immediately attention and some that don't.

The other is that it is not always easy to find the right people for the jobs at hand. So sometimes it might appear to his internal critics that enemies of the party-or at least those who are not supporters- have been put or kept in places of importance or recalled for another turn after a dubious past.

But the criticisms are not entirely without point. There were many occasions in parliament when the UNP threatened to appoint commissions and hold inquiries into various acts of omission and commission, when officials in high positions abused their power and were doubtless involved in corruption and making money hand over fist.

Those in the defence establishment, those involved in the sale of Air Lanka and numerous other deals that have left a foul smell in the civic nostril must be investigated without delay and the culprits, if any, brought to book.

This should be stated with all possible emphasis because this is not the UNP's boodelay that has been wasted, it is not the Bandaranaike's family silver or the heirloom of some dubious general with more chips than pips on his shoulders.

What has gone into the pockets of some of our pocket Napoleons and self- appointed Robespierres is the national wealth of Sri Lanka.

The public has had to suffer under one levy or another because the money needed was scandalously squandered or shamelessly stolen by those placed in positions of power.

Even if the UNP and its leader are hesitant to question these, they have a duty by the public to restore public confidence in the various arms of state by bringing those suspected of graft and corruption before the judicial process.

If they are innocent so be it. But by heaven if they are found guilty the rigour of punitive justice must fall on them.

The people ask for no less. It is not an act that can be evaded. Otherwise the wrath of the people will descend on those who only had the courage to shout but not to act.

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