Cost of living, public debt and collective responsibility – L’Île
By Dr Laksiri Fernando
Finance Minister Basil Rajapaksa is right to identify the “international drug mafia” and “fraudulent business operations” as challenges for the country, whether or not to be stated in a budget speech. However, just after that and on the same scale, he lambasted “social activists” and “civil society” organizations as harmful forces to the country, stating the following.
“Likewise, agents of foreign powers disguised as social activists exert considerable pressure on our society to the extent that today such so-called activism can overthrow strong and populist governments. It is not possible for a government alone to manage. Therefore, I invite all citizens of this country as responsible citizens to be vigilant in the face of this situation. ”(P.10).
While he calls social activists and civil society organizations “agents of foreign powers”, what is most disturbing is the call for government supporters to act as “watch groups.” This is the meaning of the last sentence. It’s pretty funny what an American citizen says! Of course, no one should move to overthrow an elected government by force or violence. But calling for an end to harmful policies, the resignation of ineffective ministers or the holding of early elections falls under democratic parameters.
Cost of life
The budget speech took price inflation, affecting the cost of living, as a major challenge. It is commendable. The answer given, however, is as follows.
“We believe that things such as changes in consumption patterns, the inadequate increase in production efficiency, the inability to adapt to modern technology, transport and storage problems, the impact of intermediaries and information asymmetry within the production chain have all contributed to the rise in commodity prices. (Para 4.5).
“We must accept that the increase in prices is due to a shortage of goods, the imposition of import restrictions, overdependence on imports, the depreciation of the rupee as well as the inability to ‘adequately encourage manufacturers. ” (Paragraph 4.6).
It is easy to think of inflation in a country as a function of demand (pull factor) and supply (push factor). If the first paragraph gives reasons in the domestic context, the second is mainly related to external factors. However, it is wrong to start with or blame “changes in consumption patterns” for “rising commodity prices”.
The author (anyone) should have distinguished between the (luxury) demands of the rich and the basic needs of the poor or ordinary. The country’s problem at the present time is particularly the latter. Of course, there is a growing demand even from the poor and middle classes due to population expansion and people’s desire for healthy, quality foods and products. Leisure and entertainment are also their needs.
It is not wrong to identify “the inadequate increase in production, the inability to adapt modern technology, the problems of transport and storage, the interference (and not the impact) of intermediaries and the ‘information asymmetry’ as contributing factors to supply shortages. If we refer particularly to the agricultural sector (rice, cereals, vegetables, fruits etc.), the Minister should have frankly admitted the blunder of “organic fertilizers” more than anything else for inflation and the current food crisis. This is not done. It was a blunder due to its unforeseen and haphazard nature.
Externally, there is nothing wrong with identifying “overdependence on imports, depreciation of the rupee, imposition of import restrictions” as the reasons for shortages and shortages. ‘price increase. However, restrictions on the import of luxury goods are not only necessary to ease the balance of payments, but also to alleviate the depreciation of the rupee under the current circumstances. These were not on the budget speech horizon at all.
When we take the Consumer Price Index (CPI) even as a cautious reflection of people’s cost of living, the current conditions are appalling. From January to November of this year, the CPI rose from 138.7 points to 150.7 points, or 12 points.
Consumer Price Index, January-November 2021
In a budget speech, when problems are identified, clear solutions should also be offered or offered. Otherwise, there is no purpose of a speech. Unfortunately, it is not the case.
Public debt and foreign exchange
It is partly understandable that public debt (foreign and domestic) exceeded 100 percent of GDP during the civil war even though some of the loans and purchases were excessive and damaging to the country. This is something that had to be resolved afterwards. This was not done and in addition many new loans were obtained mainly from China and others on behalf of ports, airports and roads. The benefits of these are long term.
There was no five-year plan or the like although it was requested by the United People’s Freedom Alliance (UPFA) coalition partners. Production, entrepreneurship and enterprises should have been promoted through public-private partnerships and through the private sector, before going to particularly important ports and roads. The promotion of production and infrastructure must go hand in hand and not one after the other. Partner parties, especially the left, should also be blamed for their lethargy or for failing to take the necessary steps to pressure or separate. Constructive independence is extremely important for the left.
Of course, there are some developed or heavily capitalist countries that allow debt to exceed GDP. The United States (128 percent) and Japan (235 percent) are two such countries. It is as if big companies take loans that exceed even their assets and carry out their renewals. However, small businesses cannot, or are not allowed to do, because their basic capabilities are limited.
Likewise, poor or just developing countries cannot afford to take large stakes in loans and debts. They can easily fall into the debt trap of taking out more and more loans to repay interest and loans. Sri Lanka is currently in this trap.
How did the Minister of Finance explain the current debt issue to the people? Here is his explanation:
“In 2014, when President Mahinda Rajapaksa handed the country over to the previous government, the country’s total debt stood at Rs. 7.487 billion. It represented 72.3% of the gross domestic product.
When the current president came to power at the end of 2019, the public debt had risen to Rs. 13,032 billion. This is how the government of good governance created the debt. (p.14).
Is this correct or not? This is something the opposition should be frank about explaining to the people. Champika Ranawaka, an eternal political rider, has at least attempted an explanation (Colombo Telegraph, “Development and Loans”, December 2, 2021). After arguing that Sri Lanka’s debt trap is mainly due to high interest commercial borrowing without concession over the repayment period, he says the following.
“As a result, the 8% of loans that were rigid and at high interest at the start of Mahinda Rajapaksha’s regime grew to 47% at the end of 2015. As a result, the country entered a vicious cycle from 2016 to borrow from commercial lenders for a large amount. interest without concessional repayment period. by the end of 2019, the percentage rose to 58%. moreover, a significant proportion of these borrowings were intended to repay previous debts. “
When Ranawaka accuses the Rajapaksa regime of taking large commercial loans during the period 2005-2015 and increasing them from 8% of GDP to 47%, he should also take collective responsibility as minister of Energy and Energy during the period at the end. .
Again, when he says the country entered a vicious cycle of commercial debt from 2016 and grew to 58% of GDP in 2019 (excluding other loans and rupees), he should take responsibility again as Minister of Megacity and Western Development. . Not to mention the Bond Scam.
I use the term “collective responsibility” in this article not only in the traditional sense of the firm. On the issue of the debt trap, forex bankruptcy, high cost of living, trade balance, balance of payments, etc., the two main players in the so-called political divide are “collectively responsible” towards the country and the people. No one should or could shirk this responsibility.
At present, Sri Lanka’s external debt trap is mainly due to commercial loans mainly obtained through International Sovereign Bonds (ISBs) from international capital markets with high interest rates (around 6 at 8%) and without a concession period. Another reason for the current debt crisis is the stubborn refusal to go to the IMF.
It was in 2007, under the Yahapalana regime, that the first ISBs worth 500 million dollars were raised and then continued during the same period and by the current Rajapaksa regime to cover foreign expenses and previous borrowing. These commercial loans, which represented only 2.5% of all foreign loans in 2004, grew to 56% by the end of 2019 (see Umesh Moramudali, “Sri Lanka’s Foreign Debt Crisis could Get Critical in 2021”, February 9, 2021 , The Diplomat).
Even to cover day-to-day internal public spending, both regimes had to rely on treasury bills and bonds during auctions and allowing direct participation. Because the treasury is always short of funds, without a proper tax system in the country and almost all state enterprises are lost in making entities. As of January 2020, more than 150 auctions / issues have been conducted for Treasury bills and bonds, with final bonds amounting to billions and billions through 2015 and beyond. As a result, the government is currently bankrupt both externally and internally. It is not the fault of one regime, but of the two regimes having a “collective responsibility” in the face of this pathetic situation.
(Author, retired Professor of Political Science and Public Policy, University of Colombo, also served as Deputy Director of Commerce, Ministry of Commerce (1969) and (Academic) Director of Colombo Stock Exchange (2010-2011).