CB Governor cautions against populist policies creeping into budget process

CB Governor cautions against populist policies creeping into budget process
2016-10-10 00:03:37

As only few weeks are left for the second budget of the coalition government , the Central Bank Governor Dr.Indrajit Coomaraswamy cautioned against populist policies creeping into the budget-making process as Sri Lanka lacks fiscal space to finance higher deficits with more borrowings, as the country’s debt dynamics have reached to absolutely worrying levels.


“So, to think that we can have business as usual with budgetary indiscipline and populist politics and a strong entitlement culture (and), if you don’t get out of that mindset we will get in to serious difficulty. Already our debt dynamics are precarious”, Dr. Coomaraswamy warned.


According to a news report published by Forbes about a week ago—based on publicly available data—Sri Lanka currently owes its financiers as much as US $ 64.9 billion, which amounts to 75 percent of the Gross Domestic Product.


About 96 percent of all government revenue is currently used for debt servicing, the news report pointed out.
The circumstances become even scarier as this year alone US $ 4.5 billion is due to foreign lenders and another US $ 4.0 billion next year. The country’s gross official reserves stand at about US $ 7.0 billion.
Speaking at a workshop organized by the Institute of Certified Management Accountants of Sri Lanka (CMA) recently, Dr. Coomaraswamy said Sri Lanka has been in the habit of borrowing even for its recurrent expenditure since 1987.


He pointed out that Sri Lanka easily got away with running such budgets as Sri Lanka received a lot of concessional funding from donors.


Sri Lanka, over the last three decades, has been conveniently living beyond its means as the country received near free money from donors as they pumped money in anticipation of better development outcomes as the country practiced liberal politics and economics since 1978. But such financial aid proved counter-productive.

However, with the country migrating into a lower-middle income nation in 2010, such easy funds dried out compelling Sri Lanka to bridge the fiscal deficit with commercial borrowings, which are far more costly and strict even than the International Monetary Fund.
“It’s a paradigm shift. We can no longer count on getting generous amounts of concessional aid. We have to go to markets and that demands discipline. If you don’t have that discipline, you will pay for it and you will pay very dearly”, he added. Sri Lanka’s debt levels reached a new high during 2009- 2014 period as the country borrowed heavily, mostly at commercial rates, to rebuild the country’s infrastructure after the war ended in 2009. This resulted in total debt tripling and external debt doubling, according to Forbes. However, the debt as a percentage of GDP gradually came down to around 70 percent when the former President Mahinda Rajapaksa administration left office in early 2015.


The current administration which came into power pledging to reduce the debt burden of the public, during its two years has increased the domestic borrowings by 12 percent and external debt by 25 percent without starting any new large scale infrastructure projects.


However, Dr. Coomaraswamy said that the country has no headroom for further borrowings. “We have now maxed out on our credit card. We don’t have the fiscal space for a public investment-driven growth programme”, he remarked. Post war Sri Lanka achieved faster economic growth of around 7.5 percent per annum largely supported by public sector-led and commercial borrowings-financed infrastructure development.


However, as the continuation of such a growth is now not possible any more, the Central Bank Governor called upon the private sector to take the lead—particularly during next two to three years—in driving the growth as the foreign direct investment to the country still remains lackluster.