This debt, that debt, and other debt
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More debt leads to rising cost of food.
Two weeks ago, quoting the Finance Ministry, the Business Times reported that the Government has absorbed billions of dollars of borrowed money by state enterprises following the standstill of external public debt servicing. The news report further stated that state-owned utilities and public sector services including energy, petroleum, water, transportation, etc have been provided to the public at below cost recovery prices for a long time.
In doing so for a “long time” – perhaps, for decades – the accumulating losses were covered by government’s budgetary allocations, or in other words, taxes paid by the public. The losses were not only due to lower prices below the costs, but also due to internal inefficiencies that inflated the operational costs, as highlighted by the Finance Ministry’s Annual Report 2022.
Public enterprise losses
As the report highlights, the total 52 state-owned business enterprises (SOBEs) reported Rs. 744 billion losses in 2022, which is a sharp increase in the previous year losses of Rs. 98 billion. The loss-making enterprises are operating in the sectors of energy, aviation, water, construction, livestock, and media.
Some of the government enterprises have borrowed heavily. No banks would dare lend money to any enterprise, whether public or private, which has been making losses and which has no proven ability to repay the loans. But even the banks used to lend to these public enterprises without any risk, when the government provides a surety – Treasury guarantees for borrowing. This is nothing to be surprised about, as anticipated, not only the losses but also their debt got accumulated too.
The Annual Report of the Finance Ministry highlights that the accumulation of such debts owned by the government enterprises has created fiscal risk burdening the government budget as well as financial stress on the banking sector itself. It’s also the government-owned banks – another variety of government enterprises – which have continued to provide loans to government enterprises, guaranteed by the Treasury creating fiscal risks.
According to the Finance Ministry’s Public Debt Summary indicators, public enterprises have accumulated US$ 3.7 billion debt, including the arrears by the end of 2022. Out of this, foreign currency debt amounts to 54 per cent and local currency debt 46 per cent.
As anticipated, it’s the government which has guaranteed this debt so it is no surprise that the government has to absorb this debt, that should be paid from the government’s tax revenue; particularly when some of the public enterprises are under the restructuring programme, which wants to buy their debt. Obviously, it is difficult for the government to sell the enterprises with debt or even to list them on the stock exchange with debt.
Debt is confusing
The term public debt, which is often used with other similar terms synonymously and interchangeably, is a confusing one to many. The confusion was multiplied sometimes, because they were presented to make the public confused. The public enterprise debt was separated from government debt while from time to time part of the debt was shifted between the two sides. Apart from that, another source of confusion was added by exchange rate variations, because sometimes public debt was needed to be reported in both Rupee terms as well as Dollar terms.
Loans obtained in US dollars are also not always foreign loans, because the Central Bank as well as the public enterprises can borrow dollar-denominated loans from domestic banks. A few years ago, there was also a question whether these loans should be treated as domestic or foreign. Whatever it is, one thing clear: These dollar-denominated loans, irrespective of their source, have to be repaid in US dollars!
The recent publications of the Central Bank and of the Finance Ministry provide guidelines to understand public debt and make debt statistics more transparent. Total public debt is reported in the Finance Ministry’s Debt Summary report with respect to three-fold components of debt: (a) Central government debt, (b) Guaranteed SOEs debt, and (c) Central Bank debt.
Foreign sources
According to Debt Summary indicators, by the end of 2022, Sri Lanka’s total public debt from both domestic and foreign sources was equal to $83.6 billion, including the accumulated arrears. This includes central government debt $76.8 billion, public enterprise debt $3.7 billion, and Central Bank (CB) debt $3.1 billion.
The central government debt accounts for 92 per cent of the total public debt. While it’s foreign currency debt component is about 53 per cent, the local currency debt amounts to the balance 47 per cent. According to the source of foreign debt, it can be divided as multilateral sources such as World Bank and ADB; bilateral sources such as China, India, and Japan; and private sources such as issuance of international sovereign bonds (ISBs). The on-going negotiations for debt-restructuring apply to the latter two types of foreign debt.
Apart from Central government foreign debt and Guaranteed SOE foreign debt, there is CB foreign debt. It includes both multilateral borrowings from international organisations such as IMF and bilateral debt comprising swap arrangements with other countries such as those with China, India and Bangladesh.
Domestic sources
Domestic source of debt applies to the Central government debt and guaranteed SOE debt, while in this case the CB is a lender to the government. More than 97 per cent of government’s domestic debt comprises borrowings through government securities – Treasury Bills and Treasury Bonds.
The government securities are held by the CB, commercial banks and non-bank financial institutions, and other institutions and individuals including foreign parties. They lend to the government holding government securities. For the CB it is lending to the government or money printing, while for others it is financial investments or savings.
Guaranteed SOE debt from domestic sources includes both domestic currency borrowings and foreign currency borrowings. While their domestic currency debt equals to $1.7 billion, foreign currency debt from domestic sources, including outstanding arrears, equals to $360 million. These foreign currency loans have been taken by the CEB, CPC, Sri Lankan Airlines, Ceylon Shipping Corporation, and Sri Lanka Insurance largely from the Bank of Ceylon and the People’s Bank.
“School of hard knock”
At the end of the day, Sri Lankans have to learn all that in the “school of hard knock” through the state of its economic crisis. Until and unless we face an unprecedented economic crisis, we were not bothered about learning the simple principles that debt cannot sustain an unproductive economy.
Even though the recovery from the pain of the hard knock takes few years to yield results, there is one thing that we need to admire: We have made a quick U-turn with unpleasant reforms. However, this is not the end of the story.
There are two pillars of the economic recovery and the economic progress beyond recovery. The first is improving the debt sustainability and, thereby restoring the “credit-worthiness” of the country. This would enable us just to repeat the “old story” and start borrowing again. This is where the second pillar is important, which is even more important than the first.
The second pillar is accelerating “export growth” through investment promotion. Apparently, the second pillar is more difficult than the first, because it requires a rigorous reform process to establish an enabling business environment. It is more difficult, not only because it looks more complex reforms in policies and regulations, but also because it would entail defeating political interests and overcoming vested interests.
In the meantime, Sri Lanka needs to restart sooner or later repaying its suspended debt with the arrears in foreign currency. For that matter alone, the country would have achieved sustainable improvements in the country’s foreign exchange earnings, which must be through nothing other than export growth. (The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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