Debt trap nears Rs.3 trillion

The country’s total debt, both foreign and domestic, is nearing Rs. 3 trillion, and a spate of borrowing, especially, fears of it going to finance wasteful state expenditure, has caused concern within civil society.

Official published figures for the country’s total debt is available only up to May and the amount is a staggering Rs. 2.77 trillion (or Rs. 2,771 billion), an increase of Rs. 387 billion, compared with a year earlier. Of this amount, the foreign component is Rs. 1.21 trillion, while the local share is Rs. 1.56 trillion.

In the first five months of this year, foreign debt has risen by US$ 100 million or Rs. 10 billion. Analysts said that if one factors in the end July figure, the public debt would have risen further. The government is also busy tapping the foreign markets to raise US$ 500 million or over Rs. 50 billion, by way of a sovereign bond issue. This move has come under flak from the opposition.

Sources said that ballooning borrowing would cause further burdens on the people, on top of existing debt servicing commitments. January to May, the total external debt service payment was US$ 383 million, of which US$ 311 million was for principal repayment and the balance on interest and other charges. However, the debt service payments made up to May, accounted for 44.5% of the estimated debt servicing figure of US$ 860 million for 2007. Interest payment on total debt was Rs. 71 billion, up by 15%, largely owing to upward movement in local interest rates.

Top economist Dr. Harsha de Silva, for example, emphasises (See Page 9 for his full comments) that what the country needs is not more debt, but equity.

“Instead of the government borrowing to build airports and start airlines, for which they say this US$ 500m is for [infrastructure] they must open out these sectors for public-private participation. The sooner these people learn economics, the better it will be for all of us,” he says. “But, the real question is, “Honestly, what is this money for”? In this era of “creative accounting” at the Central Bank and its fast deteriorating credibility, I for one, is under no illusion that this money is actually, not for infrastructure but, for day-to-day wasteful expenditure of the monstrosity of a government.

So, from an economics point-of-view, the question is not of whether this particular US$ 500m borrowing is right or wrong but, whether the logic of the government undertaking everything from health and education, to running grocery stores to airlines, is sustainable on this kind of borrowing,” emphasised Dr. De Silva.

However, official sources denied these claims and noted that the borrowing was for much needed infrastructure development. They also noted that debt, as a percentage of GDP, was at a satisfactory level, now at around 90% of GDP, compared with 105% between 2002 and 2004. The country has also benefited from robust commitment of concessionary aid from donors. Up to May, total aid commitment was US$ 874 million. Disbursements amounted to US$ 331 million, while the committed, yet, undisbursed balance, as at May 31, was US$ 4.7 billion. Treasury sources said that utilisation of these commitments, usually, involves three to five-year time frame.

With regard to expenditure, these sources also said that it has been managed satisfactorily, despite severe pressure. January to May expenditure rose by 12% to Rs. 318 billion, compared with the corresponding period of last year. Current expenditure grew sharply on account of higher wage bill (up by 30% to Rs. 85 billion) for public sector, pensions, interest payments and security related expenses. Government revenue too has been robust with a growth of 27% to Rs. 218 billion or 6.7% of GDP. Treasury is confident of meeting Budgetary targets in the revenue front for 2007.