Debt expert warns of “intergenerational sin” in Sri Lanka

• Professor Lee C. Buchheit notes that to tackle repayment of debts, succeeding generations are forced to choose from four limited options
• Options are: passing debt to their own children, paying it off through increased taxation, inflating currency to reduce debt’s real value or by defaulting and restructuring debt

By Nuzla Rizkiya 

Sri Lanka could be committing an “intergenerational sin” by accumulating excessive sovereign debt, potentially leaving future generations unable to manage the country’s financial future, warned University of Edinburgh Honorary Professor Lee C. Buchheit.

He cautioned that the growing debt burden, driven by politically motivated expenditures, risks undermining the nation’s fiscal flexibility.

“I reserve the term profligate debts for governmental borrowings whose proceeds do not provide any benefit to the succeeding generations,” said Professor Buchheit, referring to public spending on subsidies, a bloated public sector and pre-election donations. 

These debts, he noted, are “just the politically expedient alternative to taxation”.

Buchheit shared the views while delivering an oration titled ‘Sovereign Debts: The Myth of a Golden Age’, at the Central Bank of Sri Lanka, last week. According to the professor, this type of profligate sovereign debts (reflecting Sri Lanka’s stark reality) constitutes an intergenerational sin because it creates a situation where the next generation inherits a large number of colossal debts, without the power to hold the previous administrations accountable.  

To tackle the repayment of debts, the succeeding generations are thereby forced to choose from four limited options, which are passing the debt to their own children, paying it off through increased taxation, inflating the currency to reduce the debt’s real value or by defaulting and restructuring the debt.

The last option of defaulting and restructuring the debt is a deeply unpleasant process, as the sovereign debt crises never occur in isolation, he said. 

They are often accompanied by crises of economic risk, currency instability and political turmoil—an experience not very distant for people in Sri Lanka. 

Defaulting and restructuring sovereign debt does not cancel any portion of the debt outright but instead, extends the maturity of those liabilities along with the offering for some relief in interest rates. This process only pushes the debt repayment further into the future, resulting in the current generation consuming the fiscal space of the future generations by limiting their ability to borrow money. 

“Of these consequences, the premature consumption of fiscal space is what I view as a more grievous sin. A sovereign’s untapped borrowing capacity is a precious commodity. It will determine whether the country can respond with financial vigour to future exigencies (e.g., natural disasters). 

This intergenerational sin consists of a collective decision to compel our progeny to curtail their own standards of living, so that we may enhance our own standard of living,” Professor Buchheit explained. 

He concluded his speech by criticising the notion of a golden age, as depicted in the title of his speech, labelling it a myth for future generations. In reality, the people of the present pass on a legacy of colossal debts and a devoured fiscal space to their children while convincing themselves that their offspring will live in a time of universal prosperity. 

“The succeeding generation may ask itself why did our venerable ancestors choose to injure us this way? The answer, of course, is that those venerable ancestors — that would be us — merely found it disagreeable to curb our appetite during our tenure on the planet. The simple but discreditable explanation is that we are committing these intergenerational sins because we find it convenient to do so,” Professor Buchheit said.