Sri Lanka’s foreign debt doubled between 2000 and 2012 and is now more than USD18 billion or LKR2375 billion (US$1=Rs132). In comparison, Sri Lanka’s total economic output (gross domestic product) in 2011 was under USD60 billion.
As the amount of Sri Lanka’s borrowings from abroad increases, so does the amount of foreign earnings that must be spent to service this debt: almost USD1 billion in 2011 alone, which is the same as the inflow of foreign direct investment in that year.
Most borrowings in recent years have been at non-concessional rates, that is, the rate of interest is at market-level or even higher and the repayments periods are relatively short.
China is now Sri Lanka’s largest bilateral (country to country) creditor, having displaced Japan. Sri Lanka has borrowed around USD2.96 billion from China since 1997. However, because of interest payments, it now owes China around USD4.9 billion, which has to be repaid on average within 12 years from date of borrowing.
Although China has funded many projects in Sri Lanka since the 1970s, these took the form of grants rather than loans. However, since 2006 when Mahinda Rajapakse took office, China has been the source of loans for major infrastructure projects such as the Colombo-Katunayake expressway, Magumpura Port, Mattala international airport, Norochcholai coal power plant and much else.
Another enthusiast for funding large-scale infrastructure projects is the Asian Development Bank (ADB); which is Sri Lanka’s largest multilateral (inter-governmental institution) lender. The ADB has loaned around USD3353 billion but once interest payments are added, Sri Lanka will have to repay over USD4642 billion.
A third source of Sri Lanka’s borrowings – other than bilateral and multilateral creditors – is the international money markets where private institutions invest in government (or “sovereign”) bonds which the government has to buy back on a fixed date and at a fixed amount which includes interest.
Since 2007, the government of Sri Lanka has sold five sovereign bonds (most recently in July 2012) which garnered around USD4 billion for the Treasury. The sovereign bonds have been very popular because the rate of interest offered by the government is much higher than that offered by commercial banks.
The funds raised through sovereign bonds have been used to finance more infrastructure projects, but also to service earlier loans. In other words, Sri Lanka is taking new loans to repay old loans.
Having recently received the final instalment of the USD2.6 billion borrowed from the International Monetary Fund (IMF) in a ‘Stand-By Arrangement’ in 2009, the government is currently negotiating for a further USD500 million (under an ‘Extended Fund Facility’) – even before it has begun to repay the earlier loan. This is on top of the USD2 billion that the World Bank is lending Sri Lanka over the next four years.
To satisfy IMF conditionalities, the government has carried out several neo-liberal measures including devaluation of the rupee by over 16 percent since November 2011 alone; increases in price of petrol and kerosene; and sharp hikes in electricity tariffs for household users.
Even the Fund admits that consequently the rate of inflation will spike at 9.5% this year. Sri Lanka’s imports have increased while earnings from exports have decreased, widening the balance of payments crisis that drove it to the Washington D.C. based-institution in the first place. However, the IMF remains unrepentant: “The right policies have been implemented and the fundamentals of the economy have been set on a more sustainable footing”.
While it is governments who borrow, it becomes the responsibility of the country and its people to repay the debt, and that too over several generations. Meanwhile, the costs of external debt are experienced in running down scarce foreign exchange reserves, and in redirecting the island’s revenues from spending on public goods such as education, health and housing, and on job-creation and poverty-eradication, towards servicing the spiralling debt.