Sunday, August 08, 2010

Sri Lanka: Economy continues to show deep uncertainty

By Kumar David | Lakbima News

In my column of 27 June (Budget deficit and public debt set to balloon) I dealt with the 2010 budget and specifically with the budget deficit and the national debt. I did not touch on foreign trade, balance of payments and the foreign component of debt since it was opportune to do so when 2010 trends become clear. The Central Bank has released the foreign trade figures for the first four months of this year (January-April) and now it is possible to comment. Things look bad - not immediately but over the next three to five years.

The three statistics, budget deficit, total government debt and foreign trade have to be taken together to get a partial picture of a country’s economic disposition. Now we are in a position to make an assessment of the last named. Let me remind you of what I said on 27 June regarding the first two.

The Budget Speech I said was a bit of a con, and disagreed with what Sarath Amunugama, PBJ and the Finance Minister (President Rajapaksa ) had laid before us, and I asserted that the budget deficit for 2010 will be above 10% of GDP, maybe even over 12%. Second, I argued that the Debt to GDP ratio would be well over 90% by the end of the fiscal year. The Budget Speech promised that these figures would be brought down to 8% and 80% respectively; time will prove that both expectations are illusory.

Balance of payments: The first four months

Imports for the first four months of 2010 increased by a massive 42.9% to $4.19 billion, while exports increased by a mere 10.7% to $2.31; therefore our trade deficit was $1.88 billion, a staggering 122% increase over the same four month period in 2009. I do not expect a significant recovery in any of the global capitalist economies so oil prices may remain moderately stable (natural disasters and military conflict may cause spikes) but there are indications that food prices are on the rise. Oil will rise moderately later in the year as winter approaches in the Northern Hemisphere. Therefore the sober view is that our annual foreign import bill will be well above three times $4.19 billion; it is likely to be about $14 billion for the whole of year 2010.

On the merchandise export side things are not good at all. The loss of GSP+ is biting; garments declined to $935 million for the four months; an 11.6% drop from the same period last year, and it is going to get worse for the next 6 months or longer! Agricultural exports did well (that’s how we managed a 10.7% increase in exports) improving by 33% since tea prices were high. Rubber prices were high too but this is a two edged sword. Rubber prices improve when oil price drive up synthetic costs; overall however, only a small fraction of what expensive oil costs us directly is recouped indirectly through better rubber prices.

There is also the possibility of a backlash from the US - due to slow recovery or for political reasons - and this is serious. Not many people realise the US is our largest export market (22%), followed by the UK 12%, then Germany, Belgium, Italy and India, in that order and all about 5% each. Nope, the Peoples Republic, the Burmese Gorillas and the theocrats in Teheran can’t help much with trade.

Nevertheless, let us leave the political scare aside and factor in only the loss of GSP+, as it is already a reality. Then my guess is that our export earnings in 2010 will fall short of three times $2.31 million (first four months); that is, for the whole year it will be less than $7 billion. Given my expectation of a $14 billion import bill, we are heading towards a foreign trade deficit that will be in the $7 billion region.

Normally we plug this hole with remittance from the Middle East and foreign grants, loans and borrowing. Borrowing includes sovereign bond sales at premium interest rates. The hot money that flows in when we open Treasury Bill and share markets to foreign investors, in effect, serves the same purpose - I only mention this, I do not object. Remittances in the first four months of 2010 were up 14.5% at $1.2 billion, that is remittances fell short of the $1.88 billion trade deficit.

Therefore our four-month deficit on the trade plus remittances account was $680 million. Since I have argued that the trade deficit will widen in the rest of the year while remittances are likely to hold steady, we are facing a deficit of more than three times $688 million, perhaps $2 to 2.5 billion over the year in the current account portion of our balance of payments.

Therefore the government still needs a lot of foreign investments and grants, bilateral and multilateral loans at concessional rates and commercial borrowing at market rates to plug the rest of the hole. This brings me to the next part of this article, foreign debt.

Sri Lanka’s burgeoning foreign debt

The government’s total debt at the end of 2009 was Rs4.16 trillion rupees (about 86% of GDP) of which about $15.5 billion (Rs1.76 trillion) was foreign debt. Of this $15.5 billion, $4.3 billion was commercial debt (at market interest rates which include a risk premium for dicey countries), and the remaining $11.2 billion government-to-government or multilateral concessional debt. Domestic debt was Rs2.4 trillion so the domestic to foreign debt ratio (2.4 to1.76) was 58 to 42. Worsening balance of payments means that the government will have to borrow more or get more concessional aid from overseas to meet the shortfall. To avoid social conflict at home the government will not be able to carry through its salary restraints, price increases and welfare cuts to the extent that it would like to, so the deficit will rise. What is happening is that we need new loans to pay off maturing loans, we need to grow the loans since we are getting deeper into deficit, and we have the problem of paying interest on growing debt. This is a triple whammy! Commercial borrowing attracts higher interest rates (sovereign bond issues for example) and the interest rates, and schedules for repayment of principal, on the burgeoning Chinese loans are hidden from the public by the government.

In years 2010 and 2011,fortunately, not many loans mature, but 2012 is a calamity year. The foreign debt servicing schedules for the four years from 2009 to 2012, in millions of $, in the format (total/repayment/interest), are as follows:
(2009: 1043/815/228),(2010: 810/544/266),(2011; 954/652/302),(2012: 1504/1224/315).

After 2012 the picture is consistently gloomy and the figures for 2015 in the same format are (1696/1449/247) in millions of dollars. When total foreign debt servicing needs reach nearly $1.7 billion in 2015, well that will be the same as 28% of the entire government revenue in 2009! Add to this the burden of servicing local debt where interest rates are not concessional - it’s not a good macroeconomic picture at all. Budget deficit, domestic and foreign debt, and external trade all look bad.

© Lakbima News

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