Public Sector Expenditure

Public debt, according to the latest available Central Bank of Sri Lanka (CBSL) data, increased by 8.5% (Rs. 499.7 billion) year on year (YoY) to Rs. 6,354.1 billion in April, an increase, probably equivalent to the cost of building 10, ADB funded Colombo South ports, a port to be commissioned in the next few days.
This debt comprised a domestic debt stock of Rs. 3,548.7 billion; a 13.7% (Rs. 427. 6 billion) YoY increase and a foreign debt stock of Rs. 2,805.4 billion; a 2.6% (Rs. 72.2 billion) YoY increase. Domestic debt at Rs. 3,548.7 billion comprised 55.8% of Government of Sri Lanka’s (GoSL’s) total debt stock, while foreign debt at Rs. 2,805.4 billion comprised 44.2% of GoSL’s total debt stock in the review period.
Month on month (MoM), GoSL’s total debt stock increased by 0.5% (Rs. 31.5 billion) to Rs. 6,354.1 billion; equal to three years of transfer (Samurdhi) payments. This increase comprised total domestic debt increasing by 1.7% (Rs. 59.7 billion) to Rs. 3,548.7 billion MoM; while foreign debt in actual fact retarded, by 1% (Rs. 28.1 billion) to Rs. 2,805.4 billion MoM in April.
But taking Sri Lanka’s debt stock as a stand-alone entity, i.e. isolated from revenue, is like “Admiral Horthy Without a Ship” or “Hamlet Without the Prince of Denmark.” It’s revenue which goes to service GoSL’s debt stock, it’s also revenue that is required to service GoSL’s expenditure programme and that also is connected to the island’s debt stock.
According to the latest CBSL statistics, GoSL’s revenue inclusive of grants in the first four months of the year, declined by 4.2% YoY to Rs. 314.8 billion. In the same period “expenditure and lending minus repayments” increased by 7.2% to Rs. 658.4 billion. If repayments (debt servicing) is also added on, this Rs. 658.4 billion expenditure figure would have had been further bloated.
The probable reason why CBSL doesn’t show GoSL’s debt repayment figure is because debt is generally rolled over, i.e. more debt is acquired to honour existing debt commitments either in the form of reissuing maturing GoSL Treasuries to the market or issuing new ones and also by selling sovereign bonds to international markets in order to raise the necessary US dollar ($) loans.
The danger however is if a situation arises where GoSL finds it difficult to raise the required dollars to rollover its foreign debt servicing commitments. It however has not happened yet. Therefore it’s important to avoid the possibility of such a calamity by GoSL placing a check on its debt and expenditure and also taking steps to enhance its revenue collections, which may entail a commitment to painful reforms in the process.
In the case of rupee debt commitments GoSL may always print money to meet such obligations, but it cannot do that in the case of its dollar debt obligations.
Even without its repayment figures, it may be seen that GoSL’s “expenditure & lending minus repayments” figure of Rs. 658.4 billion is more than double its “revenue and grants” figure of Rs. 314.8 billion for the first four months of the year.
As economist Dr. Indrajit Coomaraswamy recently said, Sri Lanka is living beyond its means.
This chasm is being bridged by both domestic and foreign borrowings.
But as concessional loans and grants to the country have virtually dried up ostensibly because Sri Lanka has progressed to become a middle income country, this gap caused by GoSL’s dollar commitments is being “more and more” met by expensive, commercial dollar borrowings, a course, which if not checked, may lead to a dangerous situation, especially in the case of foreign debt servicing.
On the aspect of the drying up of concessional loans and grants to the island ostensibly because it has reached middle income status, there may be more to it than what the eye can see. If Sri Lanka has got its foreign policy right, a hackneyed subject which needs no further elaboration, the situation may well have been different.
Be that as it may, on the subject of the possible pruning of expenditure, in order to bring the budget deficit down, it should be done in a way that capital expenditure is not jeopardised. Capital or infrastructure expenditure is needed to build roads, utility services, ports and airports, to facilitate avenues for the increase of the wealth of Sri Lanka and that of its people.
According to CBSL, “capital & lending minus repayments” in the first four months of the year increased by 21.7% (Rs. 33.4 billion) to Rs. 187 billion.
With the drying up of foreign aid, most of Sri Lanka’s capital expenditure nowadays is financed by commercial loans. As such GoSL should ensure that such development works are targeted and the returns are quick, to enable the island and its people to soon enjoy the dividends reaped from such works, over and above the development costs.
A classic example in this instance is the accelerated Mahaweli development programme, because of which at least GoSL (forget about the masses!) is able to enjoy low cost or no cost hydro-electricity in power generation. However the Mahaweli was virtually free, built on grant aid generously provided by the West, at no cost to the exchequer, either in the form of commercial or concessional loan repayments.
In the aspect of rupee expenditure, one ingredient where GoSL may be able to cut corners is on recurrent expenditure. In this context it may be moot to quote what Coomaraswamy said recently at a forum.
He said that in 2004 the strength of Sri Lanka’s public sector was 600,000. It has since more than doubled to 1.3 million. And, on top of the expenditure that the people of this country have to bear for the upkeep of this public sector, Coomaraswamy said that productivity in the government sector is also low.
Low productivity erodes Sri Lanka’s competitiveness in international markets, which may be visible, for all to see, when one considers the retardation in the island’s export growth.
Need we say more?

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