Redoing Debt Sustainability Analysis will not change the outcome. Unless we pull a rabbit out of the hat, the probability of a second default is rising. Unlike the first domestic debt restructuring which exempted most people, the second one will be broader and deeper – it will hurt

Gota’s folly was sincerity – he foolishly believed that he must fully implement his manifesto, look what happened to him. Unless the next President wants to face the same fate, don’t honour the fiscally profligate promises you are making, the people will forgive you

Despite debt restructuring, we continue to carry a lot of debt – 110% of GDP. If these promises that are being made are to be honoured, unlike in the past, we cannot turn to a money-printing Central Bank to fund them, nor can we inflate away the existing debt through inflation

By MURTAZA JAFFERJEE

A highly competitive auction of non-existing resources is taking place. Promises are galore – lower taxes, more subsidies and higher public service salaries. How are we going to pay for all of this?

Despite debt restructuring, we continue to carry a lot of debt – 110% of GDP. If these promises that are being made are to be honoured, unlike in the past, we cannot turn to a money-printing Central Bank to fund them, nor can we inflate away the existing debt through inflation. We paid a staggering Rs 2.45 tn of interest last year (8.9% of GDP) even after suspending payment on most of the interest due on foreign debt (this is yet accruing).  For the first six months, we paid Rs 1.14 tn in interest despite domestic interest rates falling, part of this is paid for by further domestic borrowings. In this period, interest accounted for 46.5% of total expenditure. The domestic debt is now Rs 17.5 tn. 

The financial markets are sensing higher borrowing needs, the term spread (difference between policy and long-term rates) has skyrocketed to 500 basis points. We are also reprofiling our debt by issuing longer-dated bonds to reduce our short-term refinancing needs – the additional interest cost will plague us for years.

An external sovereign credit rating is a rating agency’s assessment of an issuer’s future repayment capacity. We are currently in selective default; a successful debt restructuring will lead to a better rating. An investable rating will unlock growth creating fund flows – both debt and equity. Fiscally profligate promises at an election do not bode well for a quality rating.

Growth is the key driver of debt sustainability because it enables higher tax collection (tax buoyancy) and improves the carrying capacity of the debt. Forty-eight per cent of bank credit is flowing to the government and SOEs, more borrowing will further crowd out the private sector, the engine of growth. High real interest rates dissuade consumption and investment – both are needed for growth.

Lest the constitution is changed, a Presidential term is five years. The next election will be in August 2029. From the year 2028 onwards, the treasury must settle Rs 250 bn of restructured bonds held by CBSL, the new law forbids monetary financing so it cannot be rolled over. Thus far, the weather gods have been kind to us – three back-to-back droughts during the period 2016 to 2017 derailed the Yahapalana government. We have no buffers to pay for shocks, weather being one. History is against us, more than 50% of emerging market issuers who default once, default again.

Redoing Debt Sustainability Analysis will not change the outcome. Unless we pull a rabbit out of the hat, the probability of a second default is rising. Unlike the first domestic debt restructuring which exempted most people, the second one will be broader and deeper – it will hurt.

Gota’s folly was sincerity – he foolishly believed that he must fully implement his manifesto, look what happened to him. Unless the next President wants to face the same fate, don’t honour the fiscally profligate promises you are making, the people will forgive you.