No more big foreign loan projects
New 'go-slow' model to focus on local funds, WB and ADB aid to avert debt trap, Presidential Secretary explains new strategy
Sri Lanka will no longer go for expensive foreign loan- funded projects, the financing model that was its key recourse in the past, particularly under the administration of now Prime Minister and then President, Mahinda Rajapaksa.
The solution now is to have a “new model” and to “go slow”, said P B Jayasundera, Secretary to President Gotabaya Rajapaksa. Instead of foreign loans, it was better to raise local funds to avoid the external debt trap, he said.
Sri Lanka was also looking for more backing from the World Bank (WB) and the Asian Development Bank ( ADB), institutions whose lending procedures had been deemed too cumbersome and protracted in the past.
Compared to most South and SouthEast Asian developing nations, the country’s infrastructure was reasonably good, Mr Jayasundera, an economist and former Finance Ministry Secretary, said in an interview. Apart from residual sections, the expressway network was fair. The aim now was to complete and put it to use “rather than getting into these electronic and underground trains or too many ambitious things, because the debt profile does not permit us to do so.”
Sri Lanka did not borrow last year. “This year, too, we didn’t borrow for these kinds of projects,” Mr Jayasundera said. “In the meantime, we are looking at World Bank and ADB- type projects which give more space for residual infrastructure financing,” he said.
“They are also cheaper in the longerterm and many controversial issues can be addressed with regard to procurement and tenders because those are international and it is a reasonably accountable system.”
By the end of August 2020, the Government’s total outstanding external debt was US$ 35.3 billion ( Rs 6.95 trillion). Of this, 47 percent is market borrowings; 13 percent is owed to the ADB; 10 percent each to Japan and China; nine percent to WB; two percent to India; and the rest to others.
“We are not raising debt so that the numerator is fixed now,” Mr Jayasundera said. “But we’re trying to get the GDP ( gross domestic product) back. The Government needs to shift also from foreign debt to domestic debt so the depreciation impact is not very much.”
Sri Lanka’s immediate recovery must come from agriculture because of food security and poverty reduction considerations, Mr Jayasundera said. “We have to think of agriculture, livestock and fisheries and even making them exports because many countries need food.”
There is a focus, too, on renewable energy. Solar and wind technology and other renewable sources generate cheaper energy than even hydro. There will be resistance, he said. But he said his desire was for the Government to focus on the bigger picture because “we are basically finding a solution to a US$ 5bn ( Rs 985mn) import bill”.
The policy is also to opt for competitive manufacturing. “Take pharmaceuticals,” he said. “We have been continually relying on imports. Essential drugs, equipment, etc., are manufactured even in Bangladesh. If countries such as those can produce essential drugs, Sri Lanka can also be in that game."
Before the COVID- 19 pandemic, Sri Lanka earned US$ 10bn (Rs 1.9 trillion) in exports. But US$ 5bn of that was in apparel. “So what is the industrialisation the country has gained other than importing, stitching and exporting?” he asked.
Another policy was to prepare the country to attract foreign direct investment (FDI) more rapidly. “That is why the Port City law matters,” he said. “Successive governments have thought the country is strategic but there was no positioning. We never had an economic zone for service. The Port City legislation enables us to create a service centre here with an incentive structure that will encourage the FDIs on a much stronger footing.”
The geopolitical competition was good. Port City has grabbed interest, with “everybody suspecting whether this will shift to China or whether this will shift to India”. “We are telling the Americans, instead of guessing, put your money there,” he said.
“I think this competition also helps us and our leverage because now we have to be transparent,” he reflected. “We have to make it a more global story like Singapore did, instead of just relying on either Chinese or Indian-funded railways or highway projects.”