Changing Debt Profile of Sri Lanka 0 1069

A Recent History

Over the recent past, the Sri Lankan general public has shown a great deal of interest in the subject of national debt. This has been due to expressions like the country’s “debt trap” and “debt crisis” used extensively in political debates and propaganda. The government in power as well as the opposition has blamed one another for bringing the country into such a debt trap or a debt crisis. A gripping fear of a possibility of debt default with all its adverse consequences has been widely generated. A generally accepted rule of thumb in measuring the gravity of a country’s debt problem has been to indicate the total outstanding debt as a ratio of the country’s GDP.

In this measure, the level of aggregated debt is related to a concept of total revenue generated during a financial year. Such national debt ratio can be considered equivalent to that of a corporate balance sheet ratio of debt to equity. Figure-1 captures the behavior of Sri Lanka’s Debt/GDP ratio during 2002-18. The data indicates that during key points in time, the debt levels have being significantly higher than what it is now. However, no one spoke of a debt crisis or debt trap at those times of high debt to GDP ratio – e.g. during the early 2000s. In fact, after 2004 the ratio has been generally below 100pct. In most years after 2004, the ratio was indeed below its current debt to GDP ratio of 83pct.

The total debt stock, as at 2018, remains at USD 73.7 billion. Of this the foreign currency debt is USD 36.4 billion – 49pct of total debt or 43.3pct of GDP. The remainder is LKR based debt stock. This is still manageable given that Sri Lanka can always roll over its existing LKR based debt without too much of a problem. The banking sector’s appetite for risk free assets is high and there are the captive sources like EPF and ETF. These indeed have been the natural long term players in debt markets.

Sri Lanka’s Shift to Commercial Borrowings

The portfolio of foreign currency loans is categorized into three sub sections, namely, a) concessional, b) non-concessional and c) commercial loans. Prior to 2013, 85pct of foreign borrowings was on concessional terms (see Figure-2). This has changed in 2009 with Sri Lanka successfully entering the international sovereign bond market in its debut. This also amounted to taking the pressure off domestic financing, which until then was the only source apart from donor funding that was available. The concessional external borrowings from multi-lateral agencies and bi-lateral funding sources have continued to be on a declining trend on a net basis since 2008.

Sri Lanka was pushed into international financial markets mainly due to the fact that concessional funding was not available after the country moved up to a lower ‘Middle Income’ country status from around 2004. In fact, IMF, IDA and the World Bank have taken Sri Lanka out of the “financially vulnerable” country status, on the grounds that the country as a ‘Middle Income Country’ has the ability to access international financial markets. Sri Lanka is not among the group of 37 ‘heavily indebted poor countries’ (HIPC), which are eligible for special assistance from the IMF and the World Bank.

As at 2018, Sri Lanka’s total foreign currency debt portfolio was USD 35.4 billion. Of this only USD 9.1 billion was obtained at commercial rates from financial market sources. The remainder is at concessional and non-concessional development funding rates. In other words 53pct of the foreign loans are commercial/non-concessional.

The foreign currency debt mix is dominated by USD borrowings given that our cash inflows from external revenue sources are also predominantly based in USD. This helps the country to manage any exchange rate volatility, as the matching of cash flows does not impact the debt servicing. In 2017, infact, 61pct of the total foreign debt portfolio comprised of USD, while the next largest was in SDR (20pct) followed by Yen loans (12pct) (Figure-3).

The bilateral debt component in Sri Lanka has contributed to modern infrastructure development much more than multilateral debt (i.e. WB). A closer examination of our foreign debt profile indicates that it has long term maturities. More than 75pct of the loan portfolio is maturing beyond 5 years (Figure-5). Market borrowings comprise only 39pct of the total. Refinancing of debt stock per se is not therefore, an issue. Debt servicing is the main concern.

External Debt Holders

The noise around the China debt trap too has found its resurgence since 2014. Given the investment into capital formation pursued by the then government, these investments were undertaken given the dilapidated and outdated infrastructure Sri Lanka had prior to the war ending. Therefore, such investments were paramount in order to create investor appetite for setting plants beyond the boundaries of the Western Province.

However, the data contradicts the China debt trap rhetoric created by politicians and non-academics as it is unsubstantiated and ill conceived; in fact the largest form of external debt is by way of International Bond issuances, while bilateral borrowings are from the ADB, World Bank, and Japan, while China comes in at 4th place (Figure-6). In this context what is important to understand is that all internal bonds are fungible and hence there is no financing risk but a mere cost of financing the stock of bonds.

Debt Servicing

Sri Lanka’s export earnings are one important source of cash flow which technically can be used to service the country’s current foreign debt. The higher the potential for foreign currency earnings through exports, the better it is. The country as potential lenders are unlikely then to be over-concerned about the borrower country’s capacity for repayment. International rating agencies would consider it good for Sri Lanka if our export earnings are growing on a year on year basis at a satisfactory rate. This also reduces the foreign exchange exposure attached with rupee based debt servicing.

Sri Lanka’s foreign currency denominated commercial debt as a percentage of exports, continued to show vulnerability as year on year growth of export earnings declined in 2009, 2012 and 2015. The volatility of our merchandise exports continue. The declines in export receipts (i.e. income) have added significant pressure on the ability to service foreign debt. This has made the cash flow conditions for foreign debt management per se challenging. The need is to secure USD cash flows/revenues from revenue generating activities and assets and / or cutting down USD import expenses further. This appears to be the path towards managing our ability to maintain this debt to equity mix.

Foreign Debt Servicing

The ratio of debt service ratio to merchandise exports is the ratio that gives us comfort on the ability to service our external debt payments (i.e. principal + interest). A country’s international finances are deemed healthier when this ratio is low and ranges between 10pct to 20pct. In other words, the lower the ratio the better, as it indicates that the country consumes less of export earnings to pay off its foreign debt. The ratio of total debt service payments to exports is therefore, an important measure of a country’s ability to service foreign currency loans/debt obligations. This ratio had remained well within the stipulated norms of 10pct-20pct from 2011 to 2015. The ratio has deteriorated, moving out of the applicable norm, from 2016reflecting the impact of bunching of repayments on medium term external debt. The decline of this ratio in 2018 reflects the impact of the rise in merchandise export revenues in that year.

By: Dr Kenneth De Zilwa

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US – China Trade Talks

After months of trade war, the US and China agreed to a 90-day truce to work out their differences. It was scheduled to end on Friday, but President Trump lifted the ultimatum to increase tariffs after he was satisfied by progress made in several rounds of talks in Beijing and Washington.US China Talks

A White House economic official, Larry Kudlow, said on Thursday the two countries were on the brink of a ‘historic’ trade agreement. A meeting between Trump and his Chinese counterpart Xi Jinping, was also expected soon. After the latest round of talks in February, US Agriculture Secretary Sonny Perdue tweeted that China had committed to buying ‘an additional’ 10m tonnes of soybeans as a ‘show of good faith’.

US farmers rely greatly on such trade with China: in 2017 around a third of US soybean production – worth $14bn -– was exported there, where it is used for animal feed.

Chinese tariffs had already hit America’s farming regions hard.  Exports plummeted last summer when China imposed tariffs on US soybeans and other agricultural products.

Donald Trump has requested China to abolish tariffs on US farm produce arguing that it is very important for US farmers.

In the meantime, South China Morning Post on 19th April reported that China regrets WTO ruling that China’s Tariff Freight Quota System for rice, wheat and corn violates international trade rules. The verdict was given in a case filed by the administration of former President Barak Obama in December 2016.

The US government is also seeking a total reforms of the WTO including re-visiting China’s role in the international trading system as the US believes China should no longer designated as a developing country, enjoying favourable trade treatment as China has emerged the world’s second largest economy.  

 

Brexit Deadlock Continues

The British Prime Minister said she would step down if and when her Brexit deal was delivered. There was a desire for ‘a new approach, and new leadership’, she told a meeting of Conservative lawmakers. However, members of the House of Commons voted on a range of measures designed to break the impasse over Brexit — but failed to agree on any of them.

Brexit Deadlock ContinuesThe European Union has requested the UK to accept a six months delay with an option to leave earlier if the UK Parliament can agree to a deal, The European Union leaders agreed to another delay to the UK schedule withdrawal from the EU until October 31. In the meantime, the European parliament election is due in late May and if the UK does not take part in the election process it would be required of the UK to leave on June 01st without a deal as some observed. The Prime Minister of UK has suggested that she could still manage to get her withdrawal agreement passed through parliament, in time to avoid UK taking part in the European elections.

 

New Head at World Bank

Following President Trump’s announcement that Mr. Malpass would be the US candidate for election as the next President of the World Bank, Mr. Malpass won unanimous approval from the executive board of the bank, which has 25 members. The US holds a 16% share of board voting power and has traditionally chosen the World Bank’s leader. Traditionally, the US picks the World Bank President, Europeans choose the IMF Managing Director, and the Japanese do the same for the Asian Development Bank.

David Malpass has been selected as President of the World Bank Group for a five-year term from April 9, 2019. Mr. Malpass previously served as Under Secretary of the Treasury for International Affairs for the United States.  As Under Secretary, Mr. Malpass represented the United States in international settings, including the G-7 and G-20 Deputy Finance Ministerial, World Bank-IMF Spring and Annual Meetings, and meetings of the Financial Stability Board, the Organization for Economic Cooperation and Development, and the Overseas Private Investment Corporation.  

New Head at World BankIn 2018, Mr. Malpass advocated for a capital increase for the IBRD and IFC as part of a larger reform agenda featuring sustainable lending practices, more efficient use of capital, and a focus on improving living standards in poor countries. He was also instrumental in advancing the Debt Transparency Initiative, adopted by the World Bank and IMF, to increase public disclosure of debt and thereby reduce frequency and severity of debt crises. 

Prior to becoming Under Secretary, Mr. Malpass was an international economist and founder of a macro-economic research firm based in New York City. Mr. Malpass served as chief economist of Bear Stearns and conducted financial analyses of countries around the world. 

Earlier in his career, Mr. Malpass served as the U.S. Deputy Assistant Secretary of the Treasury for Developing Nations and Deputy Assistant Secretary of State for Latin American Economic Affairs. In these roles, he focused on an array of foreign policy and development issues, including the United States’ involvement in multilateral institutions; the World Bank’s 1988 capital increase, which supported the creation of the Bank’s environment division; the Enterprise for America’s Initiative; and Brady bonds to address the Latin American debt crisis. He also served as Senior Analyst for Taxes and Trade at the U.S. Senate Budget Committee, and as Staff Director of the Joint Economic Committee of the U.S. Congress.

Mr. Malpass has served on the boards of the Council of the Americas, Economic Club of New York, and the National Committee on US–China Relations. Mr. Malpass earned his bachelor’s degree from Colorado College and his MBA from the University of Denver.  He undertook advanced graduate work in international economics at the School of Foreign Service at Georgetown University.

The World Bank President is Chair of the Boards of Directors of the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The President is also ex officio Chair of the Boards of Directors of the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the Administrative Council of the International Centre for Settlement of Investment Disputes (ICSID).

Some worry that Mr. Malpass, a critic of the bank, will seek to reduce its role. In the past, he has described the World Bank as too big. He has said he would like to lend less to middle income countries like China, which he argues are financially strong enough.

Speaking at an event at the Council on Foreign Relations back in 2017 he said: “Multilateralism has gone substantially too far – to the point where it is hurting US and global growth”. However, when his predecessor Jim Kim asked shareholders for more money, it was David Malpass who – in exchange for reforms at the bank – helped make it happen. Last year, he was part of negotiations over a package of World Bank lending reforms.

Ivanka TrumpThe US agreed to back a plan for shareholders to inject $13bn (£10bn) into the World Bank and its private lending arm, with conditions that aimed to limit the bank’s lending, and focus resources more on poorer countries. The reforms are aimed at pushing more middle-income countries towards private sector lending, and limiting World Bank staff salary growth.

White House Senior Adviser Ivanka Trump speaking during an interview with Associated Press, Wednesday April 17, 2019 in Abidjan, Ivory Coast, where Trump is promoting a White House global economic program for women said her father asked her if she was interested in the job of World Bank Chief but she was happy with her current role in the administration.

President Trump recently told The Atlantic: “I even thought of Ivanka for the World Bank. She would’ve been great at that because she’s very good with numbers.”

Ivanka Trump worked on the selection process for the new head of the 189-nation World Bank, David Malpass. She said he’ll do an ‘incredible job.’

 

US Monetary Policy Normalization

US Monetary Policy Normalization President Trump called on Federal Reserve to lower interest rates and wants return of quantitative easing arguing that the Central Bank’s policies have held back the US economy and there is no inflation.The Federal Reserve, which has increased interest rates numerous times in the last few years, recently signalled that it does not plan to increase interest rates any more for the remainder of this year.

Beyond simply cutting interest rates, President Trump also wants the Fed to bring back its policy of quantitative easing, to increase liquidity in the market and keep interest rates low. In the wake of the financial crisis in 2007/2008, the Fed enacted QE, but that program ended in late 2017.

According to Trump, if the Fed were to undertake those policies, the economy would improve dramatically, despite the fact that in Trump’s eyes, things are already going well.

Global Growth Outlook ‘Precarious’

International Monetary Fund (IMF) Managing Director Christine Lagarde in a preview of the April 12-14 IMF and World Bank Spring Meetings, said that global growth has lost momentum amid rising trade tensions and tighter financial conditions. The IMF Chief explained that the global economy is “unsettled” after two years of steady growth, with the outlook “precarious” and vulnerable to trade, Brexit and financial market shocks. However, she said that the IMF does not anticipate a recession in the near term, and the Federal Reserve’s “more patient pace of monetary policy normalisation” will provide some thrust to growth in the second half of 2019 and into 2020.

Global Growth Outlook 'Precarious'Lagarde cautioned, however, that years of high public debt and low interest rates since the financial crisis a decade ago have left limited room in many countries to act when the next downturn arrives, so countries need to make smarter use of fiscal policy. This means striking a better balance between growth, debt sustainability and social objectives and acting to address growing inequality by building stronger social safety nets.

Lagarde also said that the IMF has revised its analysis of the US-China trade war’s effects, showing that if all trade between the world’s two largest economies were subjected to a 25 percent tariff, US gross domestic product (GDP) would fall by up to 0.6 percent while China’s would fall by up to 1.5 percent.

Nobody wins a trade war,” Lagarde added. “That is why we need to work together to reduce trade barriers and modernise the global trade system.”

Source: News Agencies

Growing demand for urban TRANSPORT STRATEGY 0 1054

An efficient, modern and clean public transport connectivity is essential for a country, before we think of isolated link of Monorails link without public transport network system to fill the gap. Public investment in such assets is now becoming essential given the use of private transport and the rising cost of fuel imports. It is estimated that the split of the public passenger transport (bus and railways) in Sri Lanka has reduced from 65 percent in 2010 to 44 percent in 2018 leading to urban traffic congestion (Figure-1).

The estimated cost of this shift has increased from LKR 400 million in 2011 to LKR 2.2 billion in 2018. The worst impact of ad-hoc pricing policy on private motor vehicles (Motorcars, three wheelers and motorcycles) and fuel in 2015 illustrated by the operational vehicle fleet increased from 2.52 million in 2010 to 5.70 million in 2018. It should be noted that operational fleet of 3.90 million in 2014 increased and to 4.53 million in 2015 which is a 16 percent annual increase which was also the highest annual incise in the Sri Lankan history as a result of low fuel pricing and reduction in import tariffs on vehicles in 2015.

Factors Displacing Public Transport

Many considerations have influenced the displacement of public transport and among them,

01. The fuel pricing reduction that was introduced in 2015 witnessed the increase in petrol consumption of the transport sector from 885 million litres in 2014 to 1,329 million litres in 2015 accounting for a 50 percent annual increase, which encouraged increased use of private vehicles (Figure-2). The increase of private vehicles on the roads reduced the average vehicle speed in Colombo Metropolitan Area from 21 km per hour in 2010 to 8.2 km per hour in 2018 (main road corridors of CMA).

02. The vehicle taxation policy too increased the importation of hybrids from 115, 215 in 2011 to 172,434 in 2018 which amounts to 33 percent of the operational motor car fleet. The operated vehicle kms also increased by four fold from 2011 to 2018.

03. What is noticeable is that public transportation as provided by the railway and passenger bus services, has not improved in their service quality in keeping with per capita GDP growth during the same period.

All these are inherent weaknesses in Sri Lanka’s economic management thought process which gives rise to several short-term problems.

01. High cost of fuel and vehicle imports costing USD 1,625 million in 2018 of the reported in trade deficit of USD 10, 800 million in 2018.

02. The rising import cost and falling reserves were the two major challenges in managing foreign exchange.

03. Heavy urban traffic costing travel time and fuel waste thereby impacting labour productivity.

In the backdrop of a looming BOP crisis, despite the low fuel prices since 2014, the government in 2018 introduced import restrictions by way of imposing 200 percent cash deposit margins and high tariff based on vehicle weight.

Therefore what is needed in this hour, is an innovative package of solutions to be executed at national level for transport management through effective fiscal policies for private motorist, and fuel prices based on the reflective economic cost for the private mode of transport. Those who use road network space during peak hours should pay the road user cost, determined by the cost of the given trip. Further, the public transport system such as Bus Rapid Transport Network (BRT), and the feeder mode of public transport should be linked to high demand BRT corridors and railway networks with facilities for parking and using public transport to reach their destinations. In addition, an integrated traffic management system for urban road networks with less human intervention should be formulated.

The BRT, and high density rail solution should be considered only if there 35,000 passenger movements in a given corridor. If the passenger movements are between 15,000 to 35,000 then the BRT and corridors with less than 10,000 passenger movement should be provide appropriate modes of public transport systems. It is utmost urgent to have a transport hub to facilitate with network improvement to provide parking facilities for private motorists to switch to public transport system. The National Road network should also be improved based of the demand of the public transport network.

By: Dr. D. S. Jayaweera

Transport Economist/ Financial Analyst