ECONOMYNEXT – Sri Lanka’s central government debt had climbed to 104 percent of gross domestic product by June 2021 from 101 percent in December 2020, based on the latest national income estimates and debt data.
Sri Lanka’s nominal GDP for the 12 months ending June was 15.9 trillion rupees, while total debt had grown to 16.56 trillion rupees.
Foreign debt in rupee terms went up to 6.63 trillion rupees, from 6.0 trillion rupees, despite a net pay back of rupees as the rupee fell.
A falling rupee tends to make foreign debt rise, though the GDP can also inflate later as the currency falls.
The increase in central government debt does not take into account the fall in foreign reserves which makes net debt go up.
Sri Lanka’s central bank has also been entering into swaps taking on additional debt.
When central government loans are repaid with central bank swaps, debt is effectively transformed from the Treasury to the central bank balance sheet.
Sri Lanka has seen net foreign debt rise whenever money was printed to keep down rates, triggering forex shortages and the country loses the ability to settle loans using current external receipts.
The phenomenon was seen in 2015/2016, 2018 and 2020, analysts have shown.
Sri Lanka got the ability to print money after a domestic operations department was set up in the newly created Latin America style central bank in 1950.
Sri Lanka’s national debt has grown steadily under so-called revenue based fiscal consolidation where cost-cutting (state-austerity) was discouraged, spending to GDP was ratcheted up and the burden of higher spending was passed on to productive sectors.
Debt to GDP went up from 72 percent of GDP in 2014 to 86.8 percent by 2019 when taxes were cut and more money was printed. In 2020 debt rose to 101 percent of GDP as the economy contracted in the second quarter.
Classical economists label statist or ruling class friendly attempts to achieve budget balance by raising taxes as the ‘statistical’ alternative.
“This alternative is beset with pitfall,” classical economist B R Shenoy said in 1966 when Sri Lanka’s revenue to GDP was 20 percent and money was printed to cover what he called the ‘net cash deficit’.
“Past experience in Ceylon, which is in line with experience in virtually all parts of the world, is that in a democratic set up political and other pressures are heavily on the side of more and more spending by the government,” he said in great wisdom.
“When revenues increase, under the weight of these pressures, expenditures too increase to meet, or even exceed, revenue collections.
“There is a real danger that any program for increased revenue collections may be attended by a corresponding increase in the consumption expenditures of the government, and little may be left of the additional revenues to cover budget deficits.
“Increased revenue collections under these conditions would militate against the paramount need to step up national savings.”
Predictably under the revenue based fiscal consolidation debacle, spending to GDP was ratcheted up from 17 percent of GDP to close to 20 percent as taxes were collected from productive sectors and channeled to as higher state salaries to an expanding state worker cadre and subsidies. (Colombo/Sept26/2021)