Change the doctor rather than changing the medication to resolve country’s problems

Projects such as Nelum Kuluna and Hambantota Conference Hall do not directly benefit the people or the country; implementing such projects making use of loans is not an appropriate decision 

The following article is based on SJB MP Eran Wickramaratne’s speech in Parliament on the debate on the CBSL Annual Report – 2020 on Tuesday

By Eran Wickramaratne 

Under this Government, Sri Lanka is currently facing crises such as higher spending than revenue and higher import expenditure than exports, indicating a deficit in the current account and widening budget deficit. What needs to be done is to change the doctor rather than changing the medication to resolve these problems faced in the country. 

The cost of living and the price of petrol have gone up and the country is facing huge problems. Even a school child realises that Government revenue has declined. Now 70% of Government revenue is spent on interest on loan repayment. Lebanon is the only country in the world that pays higher interest than Sri Lanka as a percentage of national revenue.

It was first thought that changing ministers was useless for this issue and the policies should be changed. But the Government ministers were saying that though the Opposition was pinpointing the disease, they did not propose any solution. The solution to the problem in this country is to change the doctor and there is no point in changing the medication.

Today Sri Lanka is facing dual crises. One is that spending is higher than our national revenue. This is an average deficit of 7.6% of GDP since 1990. Incomes began to fall since 1995. This problem has been exacerbated by the gradual decline in the country’s revenue from 17.3% to 11.6% of GDP from 2006 to 2014 under the Government of President Mahinda Rajapaksa.

However, the previous Government had set its sights on the increase of revenue in 2018. We then said that we should take a basic step to reduce the budget deficit and increase revenue. Accordingly, the Good Governance Government was able to increase revenue to 13.5% by 2018. But due to the 2018 coup, Government revenue fell to 12.6%.

The second structural crisis is the deficit in the current account. Since 2000 exports revenue has continued to decline as a percentage of GDP. As a result of these two issues, we have to borrow internationally and locally.

Governments in our country have not addressed these fundamental issues. Even today this Government does not seem to have focused on this need. If there is a change in policy, we look forward to hearing about that change in the next budget.

Minister Cabraal, who spoke today, for the first time in 2007 went to the international market as the Governor of the Central Bank and obtained a $ 500 million ISB loan to address the issues of the budget deficit. Of course, he is now delivering sermons telling different stories that the Government does not need international money. 

That was the first time Sri Lanka had obtained an international sovereign bond loan, by Cabraal. The then Government started borrowing in 2007 as a new source to cover the fiscal deficit. Since then, it has continued to borrow dollars at higher interest rates. This is the problem faced by this country now.

In such a context, who will come and invest in Sri Lanka? We borrowed and created white elephants. This Government during its previous regime launched projects such as Nelum Kuluna and Hambantota Conference Hall that do not directly benefit the people or the country. Implementing such projects making use of loans is not an appropriate decision. Bandaranaike Conference Hall is a gift from China.

Even in the future, if we take a loan, we should invest them in a project that will generate income to the masses and the country.

Everyone remembers that in the last quarter of 2018, foreign reserves stood at $ 7.8 billion. But by the time of the 2018 coup, it was down by $ 1 billion. The Sri Lankan Rupee depreciated by 10 rupees. Although GDP was said to have declined during the previous Government, the average growth rate remained at 4.3% until the third quarter of 2018. This Government has lied that growth has slowed down but it is not true. This problem in this country arose because of the conspiracy that preceded the Easter attacks. 

The previous Government introduced a modernised Finance Bill for national accounting. The accounting system was changed. The income from it gradually increased. Now it must be said that the Central Bank has done some mathematical gimmicks with its report.

The Central Bank report 2020 showed that expenditure has decreased in that year. The national accounting by the CBSL continues to be calculated on cash basis. CBSL has changed the accounting system into accrual basis in 2020 and though it showed that the budget deficit is 11% by transferring the expenses of Rs. 420 billion to previous year’s account but actually it is 14% of GDP. Accordingly, the highest fiscal deficit of 14% recorded in this country in 38 years was recorded in 2020. 

Another gimmick was to show that the total debt to GDP ratio by 2020 was 101%, but it is 109% when combined with loans obtained by State-Owned Enterprises separately. In addition, the Petroleum Corporation’s debt of Rs. 345 billion increased by 16% by 2020. In 2019 it went up from Rs. 297 b to Rs. 345 b while the world oil prices were low, while the country did not use oil because of the lockdown. When the oil prices fell the Government did not pass on the benefit to consumers.

There was a third gimmick in this report. Although it is said that our foreign borrowing has come down, this is really a numbers game. The value of international sovereign bonds is stated in market value, but it should have been stated based on the face value. The billion dollar ISB paid recently was also based on face value. Therefore, in order to know the true value of the loan, the face value of the loan must be stated. If the face value is mentioned, the amount of foreign loans will increase further.

The Government should not to use this numbers game if we are to create credibility and the confidence in investors and rating agencies when building a country. The members of the Monetary Board are there to protect the independence of the Central Bank.