‘Lanka facing disaster on mountain of debts’

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A borrowed honeymoon with China over, Beijing has achieved its strategic objectives here.

UNP Parliamentarian and economist Harsha de Silva in a hard hitting interview with the Daily Mirror warned that Sri Lanka was heading for a disaster because the government was borrowing and borrowing at high interest rates, not for development , but to repay earlier debts. Exposing the whole façade and false figures given by government officials, he said the honeymoon with China was over because China has achieved its objective in Sri Lanka and anymore loans would be on tougher conditions. Here are some excerpts from the interview.

Q Massive loans are being taken for various projects and our debt ratio to the GDP is as high as 57 percent. How will this trend affect the county’s economy?

We are certainly going in the wrong direction in term of debts. There is no question that we are on an unsustainable path. As things stand now, the tax revenue of the Treasury is not sufficient to pay the debts. This includes the capital repayment and the interest. So what it means is we borrow to repay. So it is borrowing from one person to pay back to another person. Furthermore, our tax revenue is insufficient to meet our recurrent expenditure. This incurs a deeper deficit in the current account of the Budget. So when the President sometime says we are borrowing for development that is factually incorrect. It has become difficult to pay salaries and pensions in general and to provide food for the military. Not being able to pay these bills means not being able to meet the recurrent expenditure. So there is no choice other than to borrow. Let’s see what kind of borrowing we are making at present. Those days we used to borrow ‘on soft conditions’. We got 10-15 year grace periods with 35- 40 years to repay the loans. The interest rates of those loans were in the region of 2.5 percent.   Now this interest rate is as high as 9 percent. This is far too much to bear. Two weeks ago, when the government borrowed through the National Savings Bank, it did so at 9 percent. That is 8.9 percent plus fees. So that surpasses the 9 percent threshold. We have never borrowed at these rates in the history of Sri Lanka. If you look at the borrowings from the Exim bank of China, the interest rates are sometime as high as 6.25 percent plus fees.  An example is the borrowings the government obtained for the Hambantota Port. They were at 6.25 percent fixed interest plus fees. So the reality is that we have to pay increased interest rates. One can’t imagine how long we can sustain the circular flow of funds. From an interest rate of 2.5 percent to 6.25 percent and then to a further 9 percent is staggering indeed. Meanwhile last year’s Budget allowed private banks to borrow from overseas sources so that the government could borrow from them for its useless projects such as beautification projects and road carpeting projects which do not  produce monetary gains for the country. Last week the DFCC bank was forced to borrow at 9.6 percent plus fees from the international bond market. So what’s happening is that the government is using the country’s bank system for the purpose of collecting funds for the government. As we all know the Employees’ Provident Fund was subjected to a similar fate. Favoured individuals were appointed to high positions of the Central Bank, and they are now directing bank lending towards unsustainable government projects. So to close this loop, we are now entering into the danger zones. All the rating agencies including Fitch Ratings last week warned us that we were getting into a situation where we would find it extremely difficult to service our high cost short term debts. And however much the Central Bank downplays such opinions, international investors take into account these liabilities which could lead to debt default. In fact, these agencies recommend a rate for investors to lend money to us. We are borrowing at unprecedented rates of interest.

QCompared to previous governments, the Rajapaksa government seemed to be more dependent on loans from China. Why is China so interested in giving loans to a country like Sri Lanka? Do you see any political danger in this?

China has no interest in Sri Lanka. China’s only interest is China. And Sri Lanka’s location is crucial for China’s future. It sits at a very strategic position on its sea route which China is using to transfer raw materials from Africa. The ‘String of Pearls’, the ports it is building in the Indian Ocean; Myanmar, Chittagong in Bangladesh, Hambantota in Sri Lanka, Gwadar in Pakistan. All of these are the pearls in this string of pearls. They seek to secure the safety of their shipping lines right round the Indian Sub-continent. Also, China became very important to Sri Lanka during the war as they asked no questions about human rights or anything like that when they were selling us weapons. It was a win-win for Sri Lanka and China. The economic relationship began after that. The need for Sri Lanka was military equipment and for China it was a foothold in Sri Lanka. Now it is stronger because we seemed to be begging the Chinese for money as we don’t seem to be getting any money from anywhere else. I think this honeymoon is coming to an end in terms of Chinese money being strewn around. This is so because it has already got what it want.   Its strategic objective has already been met. It has set up a Port in the South; it has set up a Port in Colombo. That is sufficient. And even though it is not for military use at the moment; when we can’t pay the loans particularly for the projects in Hambantota and Mattala, it can easily be converted into military facilities for landing fighter aircraft in Mattala and to anchor aircraft careers and military or rather warships in Hambantota. So hereafter, I predict that the terms and conditions for financial assistance will become even more stringent.  

QWhere most of the loans are concerned the condition are not revealed to the people. Should there be more transparency with the people having the right to know more details and condition for these loans?

You know it is funny that after so long in Parliament the question about the rate of interest on the loan for Hambantota Port had to be revealed on a question I asked only a few weeks ago. The people didn’t know and still we don’t know as a members of parliament why it was done and how it was done. But the loan that was taken on a variable basis, the LIBO rate or London Inter-bank Operate which was high was changed to a fixed rate as the LIBO dropped. So when the interest rate was agreed upon at the beginning it was LIBO plus  point 9 percent (0.9%) basis. LIBO at 6 percent, so it was six plus point nine percent (6.9%). The LIBO crashed. When the LIBO came down they fixed the rate at 6.3 percent.

Q Why was this done?

I repeatedly ask this and it is in the Hanzard now. Now LIBO is 0.4. Point four plus point nine (0.4+0.9) would be 1.3 %.  So we pay 6.3 as oppose to 1.3. How many times more? So there is no right to information. Questions in parliament are not answered. Information is not made available to the public. If it is a world bank or an ADB loan everything is in the website and you can get it from there.  The terms and conditions for the Katunayake Expressway have not been revealed yet. These are all non-transparent deals. So loans are being taken, terms and conditions are not revealed. There is an important constitutional issue comes up. The Center for Policy Alternative filed a case in the Supreme Court just before the Budget last year saying the Appropriations Bill is inconsistent with the Constitution and because under article 148, the Parliament has control over finance and therefore as we are entering into a high interest rate in the short term borrowing regime.

"China has no interest in Sri Lanka. China’s only interest is China. And Sri Lanka’s location is crucial for China’s future. It sits at a very strategic position on its sea route which they are using to transfer raw materials from Africa to China"

The government must get approval of the parliament prior to getting into these large foreign borrowings. And the Supreme Court Bench consisting of Justices Shirani Tilakaradena, Priyasath Dep and Eva Wanasunsara ruled that the Appropriations Bill was in contravention of the Constitution. For whatever reason the court did not say what to do with it and the government ignored it and went ahead. And this time the President had wanted to make sure that he took care of the house keeping matters and requested for an opinion from the Court. Now he has added a new sentence saying whatever the previous legal opinions of this matter be this is how it is going to be done and there is no change.  We are not privy to any of these. This is what we hear about it. So they borrow and the parliament can’t intervene to ensure that the future generation of this country will not be burdened with repayments. The future generation will have to bear the brunt.

Q         How will this debt crisis be handled under a UNP government?

There are two ways we are going to handle this. One is there are genuine legally sanctioned debts. Then there could be what is called ‘odious debts’, meaning debts the government may have got in to, that are not in the best interests of the nation. Now if there are odious debts, then it is a matter of dealing with it in the international tribunals. Because if it is illegally constituted and illegally taken by authoritarian regime without the sanctions of the parliament even after Supreme Court rulings--that it should be done--then why should the innocent people of the country be subjected to such hardships. None of that money would have been for their benefit. So within the available legal framework our government will deal with it with the best interests of our people at heart.
With regard to earlier debts we will have to renegotiate, because the current trend is we are heading towards disaster. No country with our level of ratings like BB and B+ get so much of high ratio in foreign debt to GDP.  The Central Bank Governor Nivard Cabraal and others are saying that the GDP ratio has come down. Yes, it has come down; the reason for it to come down actually is artificial. On one hand, it is a number game. The composition has changed a lot and it is like comparing mangoes with plantains.

QThe Central Bank and the Finance Ministry are alleged to be concocting figures with regard to inflation and growth rate. What is your view?

The inflation figures are not acceptable simply because they do not follow internationally accepted norms. For instance inflation has to be calculated based on everything from the household purchases. So according to ‘Mathata Thitha’, the expenditure on tobacco and alcohol is zero. But people spend quite a bit on tobacco and alcohol. And tobacco and alcohol prices are always jacked up by the government. But none of those are in the inflation calculation. On that simple technical point, this is not globally accepted. So we don’t know what other jugglery they are doing. But this is something very clear. So it is better to leave it at that point because it is so unprofessional and it is a waste of time talking about it.  

Q  Where do all these numbers and figures come from and what happen to the money?  

On the growth rate I am surprised that growth rate is not 10 percent, because I will prove this down the road over time. I have been talking to many academics and showing them numbers.  Now the GDP growth is rated at the GDP increase. The GDP is what we produce. Let us take a simple example. When we extended the rail track from Omanthai to Palai, the Sri Lanka Railways bid for that track was US$ 650,000 a kilometer. Now that US$ 650,000 included a 150,000 US$ profit. The 500,000 was for using a Belgium rail track, railway sleepers and labour costs and everything. They cancelled that and gave it to an Indian company called IRCON for US$ 3 million a kilometer. If our GDP is reflected through rail tracks, our growth must be even higher. We don’t grow by US$ 650,000 a kilometer; we are growing by US$ 3 million a kilometre. Now when you talk to the people, they are asking where the growth is. People say they don’t see the growth. People say they can’t have three meals and their children can’t have a new pair of shoes. But according to the growth I must be doing really well.

"When the President sometime says we are borrowing for development that is factually incorrect. It has become difficult to pay salaries and pensions in general and to provide food for the military"

If you look at the GDP and calculate it according to Mr. Cabraal that is 3000 USD per capita which means a family of four and half people it is about Rs. 150,000 a family, but how many families end up getting Rs. 150,000? So what is the disparity? The disparity is out of the 3 million only 650,000 get into the circulation because that is the real value. US$ 2.3 million is robbed either as inflated profits or as commissions or something else.   So now you will be surprised the extension of Matara track to Beliatta is US$ 10.5 million a kilometer to the Chinese. If you thought the Indian are bad the Chinese are worse. Perhaps this could be the most expensive railway track in the world. OK SLR has not bid for that. I don’t know whether it is 650,000 or 2.5 million. What I say is if this is a good comparison this is a huge discrepancy. So that is why I am saying that it is not growing at 10 percent. You know all the corruption is in such numbers. You see huge government contracts on roads and all that points to a higher GDP than they announce.

QCorruption seemed to be rampant in almost all section of society. What is the reason for this?

 The ultimate objective of this government and everyone is to rob from the people. They are using all kind of mechanisms to rob. The COPE has found few instances of corruption but nothing can be done. Nobody is prosecuted. So what I am saying is if you are with me you are ok. Only if you cross the line you will be screwed. For instance the former Chief Justice and her husband and so on. But people are either scared or they had been bought over, one of the two. Look at recent cases of what happened to journalists who talked about the corruption.

Q Since the end of war in 2009, has the government been on the right track for development? Or are there are more areas that could be developed and attract foreign investments other than tourism?

That is why they are opening casinos. No one is coming. We have some hotels. Shangri-La has come. Who else has come? During Mr. Premadasa’s time there were 200 garment factories. But since 2006 what industries have gone to the village? The village is getting dollors not because the village has a factory that is exporting but because the women have gone to the Middle-East.  Minister Basil Rajapaksa is going around distributing seeds. You can’t develop a country with such programmes. These are not development strategies. Divi Neguma is not a development strategy. We are talking about five hubs. The idea is good. Aviation hub but no aircraft are coming to Mattala, Maritime hub- now a few ships are coming to Hambantota because they have made it a free port, but no revenue coming to the state from either. No industries have started there. They talked about bunkering, they talked about cement and logistics and assembly of vehicles. But nothing has happened. They talked about energy hub. What energy hub? They also talked about knowledge hub. So concepts are good but we are not moving towards them. What will happen is that the country will become a casino hub.  

Q There seemed to be a mixed reaction in the UNP on the issue of casinos? Are you against the casinos or is it only a protest against the massive tax holidays given to Australian casino magnate James Packer?

I was the first to speak about the casinos. In fact, the JHU voted for the casinos. The JHU and Wimal’s party voted for it and now there is no point in saying that they are against it. The legislation to legalise casinos happened in December 2010. And we have the names of the people who opposed it and who voted for it. Now jumping up and down and saying we are against casinos is a sideshow.

Q       So what is your personal view about Casino coming to Sri Lanka?

They can have it, if they have restricted zones for this purpose. Maybe they can have them in an island off Kalpitiya or in an island off Hambantota completely cut off from the rest of the people and they must be made to pay 40 percent tax on gross revenue and with a licence fee. But I am not for this project. One in Justice Akbar Mawatha and one in D. R. Wijewardena Mawatha and the next one coming in Krrish building, next to the Hilton. That I can’t agree. But our party’s official position is that we are opposed to it so we are going against this. Any country that allows casinos will do it only for one reason. That reason is tax revenue. If you don’t get tax revenue what is the point in allowing casino clubs?.

Q What kind of financial and long term benefits we could be reap from an international conference like the CHOGM?

CHOGM is a bigger wastage than IFFA. When they had IFFA they said we would have investment. The bills are not paid and still have not been paid. It is like the Commonwealth Games 2018 for which we placed a bid for. A delegation of 120 including Anarkali Akarsha went to bid for that. The Australian delegation had only 7 members. The CHOGM is a bigger waste of public money.We are not going to get anything from it.
And this is done with the loans taken from China. I asked from the World Bank whether the Army would be paid for all the work they were doing and it said that the World Bank was doing only a little. The government has put a big sign to show that the World Bank is doing it, but they are not doing it. Now if you look at Victoria Park there is a big sign. The World Bank says that it can’t pay the army for this work. It is some borrowed money from somewhere else.  
Government is hell-bent on breaking up opposition parties so that it can do what it want. They try to show that they are great leaders, good people and true Buddhists. But the reality is that they are bad people and bad Buddhists. So it is total hypocrisy. I hope the people will see what reality is and hopefully we will come back stronger as a combined opposition and at a regime changing election, we will be able to convince the people of the duplicity.