SL external debt sustainability

:
Intervention by Practical Economist
keeps the debate live
July 21, 2014
Practical Economist’s re-entry to the fray
In a welcome move, an economic analyst writing under the enname
!Practical Economist’ has resonded "availa#le at$
htt$%%www&ft&l'%2014%0(%1)%a-view-of-sri-lan'as-e*ternal-de#t-situation-
with-neutral-glasses%+ to this writer’s revious articles on ,ri -an'a’s
e*ternal de#t sustaina#ility highlighting the misleading conclusions of a
ress release issued #y .entral /an'’s Pu#lic 0e#t 0eartment or P00 due
to data incomleteness&
1hese articles could #e
accessed #y visiting
the following lin's$
2rst$
htt$%%www&ft&l'%2014%03%2)%sri-lan'as-e*ternal-de#t-sustaina#ility-
comlacency-#ased-on-incomlete-analysis-may-#e-the-worst-enemy%4
second$ htt$%%www&ft&l'%2014%0)%25%central-#an'-clari2es-on-de#t-
sustaina#ility-#ut-it-#egs-more-6uestions-than-the-ones-answered%4 third$
htt$%%www&ft&l'%2014%0(%0(%central-#an'-does-it-again-shoot-the-
messenger-while-ignoring-the-message%&
1he intervention of Practical Economist who has admitted that he was the
very same Practical Economist who had an interesting e*change with this
writer earlier on ,ri -an'a’s outut ga is welcome for three reasons&
Even stuid arguments should #e welcome since they create a live de#ate
7irst, Practical Economist has #rought the de#ate #ac' to life reventing it
from having a natural death for lac' of reader interest& ,ri -an'a’s u#lic at
large has of late #ecome aathetic to many issues concerning them& 1heir
silence has #een dangerous to the wor'ing of the democratic system& 1o
ma'e democracy wor', eole should sea' out oenly, agreeing or
disagreeing, on vital issues&
1his writer recalls a iece of advice given #y Professor 8ichael Jones--ee of
9:’s 9niversity of ;or' in 1<() when the students were assively silent in
his classes& =e said$ >;ou may have the most stuid oint, #ut don’t
hesitate to resent it #ecause it’ll hel us to resolve it together and #ecome
wiser&? 1hus, in a democracy, even the most stuid argument to of a
dissenting citi@en should #e referred to the silence of a oulation&
.riticism hels self-correction
,econd, Practical Economist has heled this writer revisit his
articles and comare notes in the light of the counteroints
raised #y him& 1he urose of intellectual de#ates in civilised
societies is not to win them #y crushing the oonents #ut to
gain wisdom& 1his can #e done only when criticisms are
entertained& It will ena#le all those concerned to correct
themselves if they had #een erroneous&
A neutral Budge should loo' at #oth luses and minuses
1hird, Practical Economist has claimed that his is an e*ercise
to loo' at the de#ate !with neutral glasses’& 1hat is also
welcome #ecause in any de#ate there should #e a neutral
ar#iter to adBudicate the issues that are #eing resented #y
de#aters& =owever, such a neutral Budge should ossess certain 6ualities
which have #een stiulated #y the /uddha in /rahmaBala ,utta in 0igha
Ci'aya in his advice to /hi''us angered #y those tal'ing ill of him&
1he /uddha has said$ >0on’t get angry when others tal' ill of me4 e*amine
carefully their arguments and tell them that in this sense they are correct
and in this sense they are incorrect&? Accordingly, an ar#iter wearing
neutral glasses has to weigh evidence involving #oth luses and minuses
resented #y the de#ating arties and come u with a #alanced stand
refraining from defending one side and 2nding fault with the other& A
neutral ar#iter does not do Bustice to the e*alted role he has assumed
unless he ossesses these 6ualities&
Is Practical Economist neutralD
Practical Economist has, however, not e*amined the arguments and
counterarguments in the de#ate the way a neutral ar#iter should have
done& =e, li'e P00, has not answered the vital 6uestions raised #y this
writer in the articles mentioned a#ove& Instead, he has resented his own
reasons as to why this writer has #een incorrect, raising 6uestions unrelated
to the issues at hand such as a resumed olitical #ias of this writer and
there#y colouring his neutral glasses&
Ceed for forward-loo'ing indicators
Practical Economist has argued that international organisations li'e 9C
E,.AP or I87 resent only #road guidelines and therefore they do not 2t
erfectly into a country’s seci2c situation& 9C E,.AP indicators, he says,
are not forward-loo'ing #ut #ased on historical facts& 1hus, he un'nowingly
condemns P00’s aroach&
In contrast, 0e#t ,ustaina#ility Analyses conducted #y I87 and Eorld /an'
are more forward-loo'ing since they ta'e into account diFerent scenarios of
shoc's involving changes in e*change rate, interest rates and outut levels&
1hat was e*actly the oint which this writer too has made&
“Practical Economist has Busti2ed ,ri -an'a’s high de#t%G0P ratio #y 6uoting
countries from the develoed world which have even higher de#t to G0P
ratios& 1he countries 6uoted include 9,A "<HI+, 9: "5(5I+, .anada "(5I+,
Australia "H)I+, Germany "5(5I+ and Cew Jealand "111I+& 1his is a
dangerous comarison #ecause all these countries are in a osition to issue
foreign de#t in their own currencies and therefore could reay those
#orrowings #y rinting their own money& ,ri -an'a, to the contrary, has to
#orrow in foreign currencies, mainly in 9, dollars, and therefore cannot
rint dollars to reay those loans& A more aroriate comarison would
have #een with countries of similar status li'e 1hailand, 8alaysia,
Indonesia, /angladesh, India and .hina where e*ternal de#t to G0P ratios
are much lower than ,ri -an'a’s )0I ranging #etween 10 and 53I?
Kemittances 2rst to #e used to ay for imorts
P00, having relied on historical analyses which are now discarded #y
Practical Economist, had used a wrong set of data to inform the u#lic that
,ri -an'a has >continued to imrove its e*ternal de#t sustaina#ility
indicators? as er the 9CE,.AP indicators rescri#ed in the 8anual on
EFective 0e#t 8anagement&
1wo issues were raised #y this writer$ 7irst, P00 cannot claim that the
country’s e*ternal de#t sustaina#ility has imroved Bust #y ta'ing into
account only the central government’s e*ternal de#t4 second, even the
num#ers relating to the central government’s e*ternal de#t and arameters
used for calculating indicators have not #een in accordance with the
recommendations of 9CE,.AP 8anual&
Lne area of contention was the use of remittances as a arameter for
calculating the de#t sustaina#ility of the country& Practical Economist says
that it is 6uite right for ,ri -an'a to include remittances as a steady Mow of
foreign e*change since they are availa#le to service its de#t, an aarent
Busti2cation of what P00 had done stealthily violating the /an'’s
governance code& /ut when a country has a massive trade de2cit
e*ceeding this steady Mow, remittances are 2rst used to #uy imorts
there#y wea'ening the cushion it may rovide to service e*ternal de#t&
,ince ,ri -an'a cannot crunch imorts, e*ternal de#t has always #een
reaid #y reissuing the same or #y #orrowing new funds& 1hus, .entral
/an'’s Economic Kesearch 0eartment consisting of theoretical economists
has very correctly chosen not to view remittances in this sense&
Kesults of the de#t vulnera#ility yardstic' not encouraging
1his writer too, li'e Practical Economist, argued that the country should go
for a forward-loo'ing de#t vulnera#ility yardstic' rather than historical
indicators&
1his is what this writer said in his 2rst article on the su#Bect$ >1here are
many other indicators suggested #y #oth the 9C E,.AP 8anual and I87’s
E*ternal 0e#t ,tatistics to assess a country’s e*ternal de#t sustaina#ility&
Lne such indicator used #y E,.AP in its Economic and ,ocial ,urvey for
2015 is the E*ternal 0e#t Nulnera#ility ;ardstic' " 52+& In this ;ardstic', the
sum of short term e*ternal de#t, 6uarterly imorts #ased on four 6uarter
moving average and estimated international ortfolio investment is
e*ressed as a ercentage of the e*ternal reserves of a country& It thus
measures the num#er of times a country’s short term o#ligations are #igger
than its availa#le foreign reserves& /y using the num#ers reorted in the
.entral /an' Annual Keort for 2015, this yardstic' was calculated in
resect of 2012 and 2015& It amounted to 1<(I and 1HHI in the resective
two years lacing ,ri -an'a in the category of most vulnera#le countries&?
1hus, there is no diFerence #etween Practical Economist and this writer
a#out the need for using aroriate indicators for assessing the country’s
e*ternal de#t sustaina#ility&
.ommercial #orrowings should #e used roductively
Practical Economist has argued that when ,ri -an'a’s income is rising, there
is no danger of the country going for commercial and non-concessionary
#orrowings&
1his writer agrees su#Bect to 6uali2cations& In his 2rst article, he wrote$
>1his is not to suggest that commercial and non-concessionary #orrowings
are undesira#le for ,ri -an'a& 1he country’s savings O artly due to low
rivate savings and artly due to government’s e*cess consumtion over
revenue, a situation called government’s dissavings O are around 1H to
20I& /ut its investment re6uirements are #etween 50 to 53I& =ence, the
conse6uential massive savings-investment ga has to #e 2nanced #y using
the savings of foreigners, mo#ilised through #orrowing and direct
investments& /orrowings add to country’s de#t, while direct investments
don’t& =owever, direct investments have #een at a very low level O less
than P 1 #illion on average O generating a little over 1I of G0P& 1he country
does not get worthwhile foreign direct investments due to its oor trac'
record in several 'ey areas$ rotection of roerty rights, rule of law, law
and order and ease of doing #usiness& =ence, the only source availa#le for
maintaining a high investment ratio is to generate funds from foreigners
through #orrowing and there-again, #orrowing from commercial mar'ets&
=owever, since the foreign commercial #orrowings increase the country’s
ris' and reduce its de#t sustaina#ility, they should #e used only in roBects
that are voted as high riority after carefully conducted cost-#ene2t
analyses& /ut if they are used in low yielding roBects that have #een
chosen haha@ardly, then, such foreign commercial #orrowings increase
only the country’s ris's&?
It aears that the learned Practical Economist has missed this oint&
0anger of condemning critics without 'nowing facts
Practical Economist has also made sweeing statements not relevant to the
issue at hand or su#stantiated #y actual facts& =e has said that in the ast
there had really #een situations where the country had got into e*ternal
de#t vulnera#ility and the economic advisors in those times had not
advised the then governments of the imminent de#t crises& =e has
e*ressed his surrise why this writer did not see the unfavoura#le
macroeconomic and e*ternal de#t situation in the country in 1<H< as
alarming&
0uring this eriod, this writer was only a 0euty 0irector of Economic
Kesearch in the .entral /an' and not in the rivileged osition of serving as
an economic advisor to the then government& /ut in a aer he u#lished
in the .entral /an' ,taF ,tudies "Nol 1), Co 1 Q 2 O Aril-,etem#er 1<H)+
under the title !E*ternal 0e#t 8anagement ,trategies$ 1he .ase of ,ri
-an'a,’ he warned the olicy-ma'ers not to #e guided #y not-so-#ad ast
indicators #ut #e alert to the emerging critical situation when the de#t
issues are e*amined from a forward-loo'ing ersective&
1his is what he said in that aer$ >,ri -an'a’s inde#tedness to the outside
world continued to rise in nominal terms in the 1<H0s in resonse to a high
investment rogram imlemented after the adotion of the oen economy
olicies #y the country in 1<(("R&&+ Accordingly, ,ri -an'a’s outstanding
e*ternal de#t rose from ,0K 1522 million in 1<H0 #y a#out three-fold to
,0K 55)1 million in 1<H( raising the de#t%G0P ratio from 43I to (4I& 1he
worrisome imlications underlying the increased inde#tedness were felt #y
the country toward the middle of the decade, when the signs of a general
slowing down of the economy was witnessed after 1<H)&? " 104+&
=is recommendation in the aer was that the country should not go for
ris'y commercial #orrowings and instead use non-de#t sources li'e foreign
direct investments to meet the foreign e*change demand and #oost the
economic growth " 154+& 1hese two recommendations erfectly 2t into the
current situation in ,ri -an'a&
Ehen revenue account in de2cit, #orrowings are used for consumtion
Keferring to another historical fact, Practical Economist has e*claimed$ >It is
now well-'nown that ,ri -an'a #orrowed P (<2 million from the 9,A at high
rates of interest to #uy wheat to eat #read from 1<)3 to 2001S? =is
reference here is to the famous P- 4H0 arrangement which ,ri -an'a had
with 9,A to get wheat Mour from that country to meet ,ri -an'a’s chronic
and acute food shortage esecially during 1<(0-((& 1his was done under
counterart agreements where#y ,ri -an'a aid for such wheat imorts #y
maintaining a ruee deosit account in the .entral /an'& 1hus, there was
no immediate ayment of foreign e*change #y the country&
1he allegation made #y Practical Economist is a oint initially made #y a
to olicy-ma'er at various u#lic forums aarently in an attemt at
demonising ast administrations& It aears that Practical Economist has
coied it without giving due credit to that olicy-ma'er or reference to the
resent situation& 1he resent situation is that the Government runs a
de2cit in its revenue account where the Government’s consumtion
e*ceeds its revenue& 1herefore some of the #orrowings even today are used
for consumtion& Eithout drawing on the wisdom of theoretical economists
one cannot say which is worse$ eating American #read or sending on
wasteful Government consumtion&
,ri -an'a cannot rint dollars to reay de#t
Practical Economist has Busti2ed ,ri -an'a’s high de#t%G0P ratio #y 6uoting
countries from the develoed world which have even higher de#t to G0P
ratios& 1he countries 6uoted include 9,A "<HI+, 9: "5(5I+, .anada "(5I+,
Australia "H)I+, Germany "5(5I+ and Cew Jealand "111I+& 1his is a
dangerous comarison #ecause all these countries are in a osition to issue
foreign de#t in their own currencies and therefore could reay those
#orrowings #y rinting their own money&
,ri -an'a, to the contrary, has to #orrow in foreign currencies, mainly in 9,
dollars, and therefore cannot rint dollars to reay those loans& A more
aroriate comarison would have #een with countries of similar status
li'e 1hailand, 8alaysia, Indonesia, /angladesh, India and .hina where
e*ternal de#t to G0P ratios are much lower than ,ri -an'a’s )0I ranging
#etween 10 and 53I&
Ceed for reading I87 statements #etween the lines
Practical Economist has also claimed that none of the international agencies
li'e I87 or Eorld /an' or rating agencies has warned ,ri -an'a a#out an
imminent e*ternal de#t crisis& 1he reorts su#mitted #y these agencies
have to #e read with two 6uali2cations&
7irst, ,ri -an'a is also a shareholder of these institutions and therefore they
use a dilomatic language to communicate their concerns to !their own
owner-masters’& 1hey do not use cynical hrases li'e !letting the cat out of
the #ag’ in order to stress their oint& =ence, one has to read #etween the
lines to really understand what they communicate&
,econd, their reorts use technical language #ased on rigorous economic
concets to communicate their views and unless one is conversant with
those theoretical concets, he is una#le to gauge their true meanings& 1his
is li'e a la#oratory reort on a atient that can #e read roerly only #y a
6uali2ed hysician& 1his shows the de2ciency with which one suFers if he
has no sound-footing in theoretical economics&
I87 has indeed alerted the Government
1he recent reorts issued #y I87 do not suort the claim made #y Practical
Economist& In its Article IN .onsultation Keort in 8ay 2015 "availa#le at$
htt$%%www&imf&org%e*ternal%u#s%cat%longres&as*Ds'T4035<&0+, I87
8ission has assessed the foreign reserve ade6uacy as well as the e*ternal
de#t sustaina#ility under diFerent scenarios&
A#out foreign reserve ade6uacy, I87 in its usual olite and technical
language has o#served that though reserves have increased >coverage still
aears somewhat low when Budged several commonly used metrics? "
14+& 1hese metrics have #een reorted in a small diagram on the same
age& Accordingly, in terms of ,ri -an'a’s short term de#t amortisation
needs and going #y the virtual 2*ed e*change regime #eing currently
ractised, foreign reserves are totally inade6uate romting I87 to advise
that e*ternal osition needs further >strengthening?, the dilomatic
language which it uses to alert its owners&
As for e*ternal de#t sustaina#ility, ,ri -an'a’s stress testing, a forward-
loo'ing measure of ris' assessment, does not reort a healthy icture if the
e*change rate dereciates or interest rates increase or growth rates falter
"Aendi* on 0e#t ,ustaina#ility Analysis in the Keort+& 1heoretical
economists 'now that these are real ossi#ilities that do not ermit olicy-
ma'ers to #e comlacent&
.aution a#out commercial #orrowings #y I87
A#out commercial #orrowings, the then I87’s Kesident Keresentative,
:oshy 8athai, in a ress #rie2ng on 5 0ecem#er 2015 "availa#le at$
htt$%%www&imf&org%e*ternal%n%tr%2015%tr120515&htm+ has con2rmed this
writer’s stand& =e said that commercial #orrowings >have to #e done in a
rudent way, the rates have to #e loo'ed at carefully, andUas we "I87+
emhasise in the reortUthe returns that are gotten on the investments
2nanced #y those #orrowings have to #e suVcient to cover the #orrowing
costs& 1hat simle idea always has to #e 'et in mind?&
1hese are very olite statements and their real meaning #etween lines has
to #e read correctly #efore claiming that I87 has not ut ,ri -an'a on alert&
A#out rating agencies, ,ri -an'a has #een continuously rated #elow !Bun'
#onds,’ alerting investors that there is a high ro#a#ility of loan default&
7allout from Practical Economist
1he revious P00 ress releases were indictments against the 8onetary
/oard and senior oVcers of the .entral /an', resectively& 1he intervention
of Practical Economist who has ta'en ride in #eing ractical and not
theoretical is aarently an indictment against .entral /an' economists
who are technically-sound rofessionals with mastery of theoretical
economics&
"E&A& EiBewardena, a former 0euty Governor of the .entral /an' of ,ri
-an'a, can #e reached at waw1<4<Wgmail&com&+

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