CB Governor’s claim “ The Debt to GDP ratio is satisfactory”– Is this so?
A local newspaper has quoted the Governor of the Central Bank as saying that there is no reason to ring alarm bells as the Debt to GDP ratio(Debt/GDP) is much better than it was during the time of the (previous) UNP regime. There are many reasons to believe that the Governor’s statement has to be taken with a kilo of salt.
This ratio needs to be reinterpreted in view of the reasons set out below:
1. The denominator of the ratio should be the Gross National Product which has for the past 30 to 40 years been lower than the GDP. The GNP takes into account the effect of the year’s net foreign exchange transactions i.e. changes in the foreign asset holdings, as well and therefore reveals the true picture of our National Income. The GDP deals with only the local product/expenditure.
2. Government expenditure constitutes a component of GDP under the two approaches of measurement, namely the Expenditure and Product or Value added. When such expenditure is overblown due to a bloated public service, or the numerous portfolios created and the accompanying merry- go- rounds of appointments to positions of Secretaries of the permanent, private, coordinating, public relations type including Advisors, Consultants, etc positions created for reasons of political expediency, there will be only a phony increase of the GDP and GNP.
3. The figure for Government investment which is also part of the GDP and GNP is also an exaggerated figure as it includes “commissions” paid to the numerous Ministers and Deputies. This figure may seem intangible. But a reasonable guess can be made on the basis that a former minister had contributed Rs.60 million about 10 to 15 years ago to party funds (as reported in the media and not denied) apart from his deposit of Rs. 600 million in the (failed) Golden Key Finance Co. If one minister in the then, low density Cabinet could have earned Rs. 600 million one can extrapolate to measure the amount added to the investment expenditure of the government when there are nearly 90 portfolios! Besides notice has to be taken of unproductive expenditure on ports and airports and some infrastructure projects which also could have been avenues for corruption and nominal additions to the GDP.
4. As reported in parliament the Director General of Census and Statistics has also been in the habit of magnifying, euphemistically massaging, the quarterly figure for the GDP by an increase of 0.5.
5. The actual amount of the debt appearing in the numerator needs to take into account the ratio of the local debt to foreign debt. If the foreign debt component is high a “premium” has to be factored in to reflect the value of this scarce resource making the numerator larger. Finally, when one deducts the overblown figures from the GNP it will be seen that the figure for the GNP will be lower than the figure on which the debt to GDP ratio was envisaged by the Governor. Let us not forget how Greece came to grief recently due to a misinterpretation of debt ratio. Are we Helayas trying to compete with our Hellenic relation? We look forward to some form of clarification from the authorities in the public interest.
Leo Fernando
Cairns, Queensland
Australia