Loosening the debt trap and resolving the foreign debt crisis

Resolving the foreign debt trap discussed last Sunday is a mammoth task as the annual debt servicing costs are very heavy in the next few years. Meeting the impending debt repayments for this year and next year are immensely difficult. The debt repayment of as much as US$4 billion in 2019 is unthinkable at present. The severity of the problem is such that further foreign borrowing is likely to be needed to meet this year’s debt servicing obligations.

Mitigating the crisis

Three vital steps towards mitigating the impending debt repayment crisis are recognition of the problem and the need for strong measures to cope with it, monetary, fiscal and exchange rate policies geared to improve the balance of payments by reducing the trade deficit and professional management of the debt at this critical juncture that requires a judicious use of financial instruments in a manner that minimises debt servicing costs in the future. The prudent management of the foreign debt also requires clear cut bold economic decisions.

Debt repayments

Foreign debt and repayments have been increasing since the unity government took office in 2015. According to the Treasury, debt repayments increased to US$2 billion in 2015 from US$1.4 billion in 2014. In 2016 debt repayments reached US$1.6 billion.

These figures are much less than those of the Central Bank as the Treasury figures only contain project loans and loans taken by the government. The Central Bank figures are higher as they contain all foreign loan liabilities. However the lower figures of the Treasury are adequate to demonstrate the severity of the problem.

Next three years

The impending debt repayments in the next three years are onerous. Debt repayments are increasing this year to US$2.4 and to US$2.5 billion in 2018. Then it balloons to as much as US$4 billion in 2019. Debt repayments in the last two years were a serious burden 2014 ......................................... 1,442 2015 ......................................... 2,031 2016 ......................................... 1,828 2017 ......................................... 2,417 2018 ........................................ 2,564 2019 ....................................... 3,992 Source: Ministry of Finance and resulted in further foreign borrowing.

Trade deficit

A significant balance of payments (BOP) surplus would ease the repayment of debt. To achieve this, the trade deficit must be contained at a much lower amount than currently. Recent balance of payments outcomes have been woefully unsatisfactory primarily owing to the large trade deficits. In 2015 the trade deficit reached a massive US$8.4 billion only to be surpassed in 2016 to US$9.1 billion. Consequently, there were balance of payments deficits.

The overall balance of payments had a deficit of US$1.5 billion in 2015 and US$0.5 billion in 2016. This was despite the trade deficits being offset by remittances from abroad, earnings from tourism and other service receipts. Had the trade deficit been contained to about US$ 7.5 billion, there would have been overall BOP surpluses.

BOP surplus

In the current crisis situation a BOP surplus of about US$2.5 bil- lion is needed to make a dent in the debt profile. The containment of the trade deficit to below US$8 billion is vital to enable a significant contribution to the external reserves to assist in the containment of the debt servicing burden. Fiscal, monetary and exchange rate policies must ensure that the trade deficit is contained at about US$7.5 billion.

Debt management

The magnitude of the debt repayment problem is too high to be resolved by improvements in the balance of payments alone. It is therefore essential that a professional management of the foreign debt that enables repayment obligations be put in place. Astute use of financial instruments would be needed to achieve this. Overcoming the foreign debt repayment problem would require the use of several financial instruments including currency swaps, renegotiation of debt repayments over a longer period and redeeming high interest loans with lower cost borrowing.

The possibility of getting these arrangements are a serious challenge in a context when the country’s external finances are at a low ebb and the country risk is high. Nevertheless it is important to attempt such means of easing the debt repayment.

Economic reforms

Economic reforms are a vital part of the strategy to improve the external finances immediately and in the long run. Divesting of loss making state enterprises would strengthen the public finances. Sales to foreign investors would bring in foreign funds that would help redeem foreign debt. However there is doubt about these being implemented owing to public protests.

Despite the government’s undertaking to reform loss making state enterprises, the current political context and incessant protests make it difficult to implement significant reforms. This could also jeopardise receiving the remaining tranches of the IMF Extended Fund Facility (EFF) that would aggravate the debt repayment.

The proposed Chinese investments in Hambantota of about US$2 billion would have made a significant contribution towards debt repayment.

Way Forward

The magnitude of foreign debt repayment is such that a multi-pronged strategy is needed to ensure that the country does not default in its repayments. In as far as this year’s challenge is concerned, it is important to generate a balance of payments surplus of about US$3 billion to ease loan repayments. This can be achieved only if the trade deficit is reduced from last year’s US$9.1 billion to about US$8 billion or less. A drastic reduction in imports is essential to achieve this as exports can be expected to increase only moderately.

Realistically the debt repayment obligations of this year would be difficult even with these improvements. Therefore prudent debt management through currency swaps, renegotiations of loan repayments, easing of interest costs by redeeming high cost borrowings with lesser cost loans and longer maturity periods and debt equity swaps are vital.

The strengthening of the economy by economic reforms and appropriate macro economic policies is vital to resolve the long term weaknesses in the external finances. Hard policy decisions to introduce economic reforms that propel the economy to a higher growth trajectory are essential. The fundamental weakness in the polity is that it shuns such decision making to aggravate economic problems.

The fundamental lesson that must be learnt is that foreign borrowings must be used for projects that are productive and bring returns above the costs of the borrowing. Even productive foreign loans with a long gestation period and short maturity create foreign debt liquidity problems. Foreign loans should be used for investments that increase tradable goods.

In the chaotic merry-go-round characterizing the drafting of Sri Lanka’s proposed Counter-Terror Act (CTA), the periodic surfacing of one version followed by another has given rise to unexpected horrors. Each time that a new draft emerges or should I rather say, is ‘extracted’ with great pain out of a process gripped by skullduggery and secrecy, its devious drafters conceive new and ingenious ways to confound scrutiny.

Legal clauses to mask and deceive

Even as one objection is taken to categorically dangerous definitions of proposed offences, these are whipped away, soothing the unwary. Yet later, they emerge, clothed in chameleon colours to mask and deceive. Nothing proves this point better than the CTA draft that went before the Cabinet of Ministers this week. This contains hasty revisions made on the cusp of a suddenly suspenseful vote in the European Parliament seeking a rejection of the EU GSP Plus facility which was defeated.

Ostensibly, its contents were supposed to have been improved. Yet what we see is not reassuring. The draft reeks of bad faith and is extraordinarily contradictory. Indeed and outrageously so, it contradicts explanations for drafting positions taken by the drafters themselves. Two glaring examples will suffice for the moment. The initial CTA version leaked to this newspaper last year had included the offence of espionage. Following public concern, this was removed in a later version. As formally recorded, the reason given for this removal was because this offence would more properly belong in a separate National Intelligence Act.

But now, in the face of that very explanation, various offences under espionage have been sneakily restored to the latest draft while omitting the sub-heading ‘espionage.’ Thus, the offence of ‘abetment’ is defined to include ‘gathering confidential information’ if linked to ‘terrorist’ or terrorist related offences. Treacherous consequences which may ensue are tied into the very broad definitions of terrorism related offences. In addition, confidential information has been vaguely defined inter alia as information that may adversely affect public security.

Scant protections in a dysfunctional system

Risks inherent therein are not mitigated by protections offered for anything published in ‘good faith’ with ‘due diligence’ and ‘for the benefit of the public in the national interest in registered print and electronic media or in any academic publication.’ It is interesting that this protection is afforded only for ‘registered’ media. Meanwhile a notable omission in those given protection is online media which should sound warning signals for cyber advocates.

In any event, terms such as ‘good faith’ and ‘due diligence’ provide scant protection in a dysfunctional judicial and prosecutorial process. Provisions that are perfectly reasonable in functional Rule of Law systems assume sinister meaning connotations here because of that reality. This is not an abstract point as seen in the manner that the far less hazardous Prevention of Terrorism Act (PTA) was wielded against journalists and critics for decades.

Bitter animosity against the Rajapaksa regime was manifest in that regard. Why are we beckoning to laws that may provide greater opportunities for political repression? This is a baffling question.

Reinventing previous ‘vague’ terms

In another equally furtive move, the term ‘unity’ in relation to the definition of ‘terrorist’ and terrorism related offence’ has also been brought back. Earlier, this was removed after persistent criticism. As the drafters themselves admitted, the term was vague. Classifying a terrorist related offence if one writes or talks in a manner that may offend ‘unity’ (subjective in its very essence) is perilous to say the least.

But wondrously, this week’s CTA restores ‘unity’ as a component of ‘Offences of Terrorism’ and other related offences. Culpability arises when acts are known or reasonably believed to adversely affect the ‘unity, territorial integrity, sovereignty, national security or defence of Sri Lanka.’ The related offences are repetitive and vaguely defined. They include ‘specified terrorist offences’, ‘aggravated criminal offences associated with terrorism’, ‘offences associated with terrorism’ as well as ‘terrorism related offences’ and ‘abetting terrorism and terrorist organizations.’

Thus, talking or writing that ‘causes harm to the ‘unity, territorial integrity or sovereignty of Sri Lanka,’ amounts to abetting terrorism and terrorists. That this proposed offence is deemed not to affect the exercise of a ‘fundamental right’ in ‘good faith’ is a sop thrown to the needy. Its efficacy depends on a vigorous Supreme Court conscious of its constitutional role and a vigilant civil society. With some exceptions, one cannot profess a great deal of confidence in either.

Where is this famed ‘accountability’?

Meanwhile police powers in compelling bank statements, calling for information from service providers and senior public officials etc without applying for a magisterial warrant can now be met with refusal to comply. Further action is only through activation of the legal process which is some relief at least. However, a suspect’s right of immediate access to legal counsel upon arrest continues to be hedged around by qualifications rendering it meaningless. Here too, the revised amendment to the Code of Criminal Procedure Act appears to afford the right but then craftily denies it later.

In sum, the contents of that amendment and the revised CTA draft appear to be an uncomfortable exercise in ‘lies and deception.’ Indeed, it is an insult to assume that masking language and offences in this way will not result in the pretence being exposed. As repeated ad nauseam in these column spaces, both these amendments should have been publicized by the Government of Sri Lanka and extensively subjected to detailed independent scrutiny. But the converse takes place.

In the minimum, the CTA draft has not even yet been sent to the Human Rights Commission of Sri Lanka (HRCSL). This is despite the fact that the specific mandate of the HRCSL (Section 10 (c) and (d) of Act, No 21 of 1996), is to advise and assist the government in ‘formulating legislation…in furtherance of the promotion and protection of fundamental rights’ and to recommend on compliance with international human rights norms and standards. The contempt thus shown for a prescribed statutory process is nothing short of scandalous.

Menacing eventualities before us

Once the document is in Bill form on the Order Paper of Parliament, there is only limited time for challenge if needs be in Court. This absurd and counterproductive scramble in forcing through laws is deplorable. Whatever revisions that may take place at committee stage to this Bill is also out of our hands.

Certainly these are menacing and high risk eventualities for a law that can be used to crucify Sri Lankan citizens by any Government, present or potential as the case may be.