Taming Inflation, Debt

CEYLON TODAY | Published: 2:00 AM Jan 13 2022

Yesterday, Census and Statistics Department (CSD) data showed that Sri Lanka’s poverty line, be-devilled by inflation, rose by 50.70 per cent (Rs 1,891) to Rs 5,621 over an eight-year period to last November (2021).

That means that for a person to make ends meet and to be considered as being not poor according to the official definition will have to earn Rs 5,621 per mensem.

Meanwhile, in the 11-month period to end November 2021, the increase in the poverty line alone was 9.21 per cent (Rs 474) to Rs 5,621. 

But can a family of four survive on Rs 22,500 per mensem as per the CSD definition ‘they can?’ That, however, is a debatable point.

Amidst these dubious developments, Sri Lanka has to pay foreign debts to the tune of a minimum of US$ 4 billion this year. 

This foreign debt obligation has to be looked at in the context that the country’s foreign reserves had fallen to a parlous $ 1.6 billion as at last November (2021), discounting the $ 1.5 billion equivalent yuan swap from China. 

This discount is taken in to account in the context that Chinese importers themselves want to be paid in dollars and not in yuan, thereby raising the practical question as to whether it makes sense to take the yuan into the country’s foreign reserves portfolio, despite the fact that the yuan is universally accepted and recognised as a global currency. 

Meanwhile, of the minimum $ 4 billion debt obligations that Sri Lanka has to honour this year alone, $ 1.5 billion of those is for international sovereign bond (ISB) settlements, which borrowings are commercial in nature as opposed to concessional loans, while other ISB repayments only, discounting other foreign debt repayments of GoSL, due, in the remaining eight years to 2030, total $ 11,550 million.

The breakdown of those ISB repayments is $ 1.25 billion in 2023, $ 1.5 billion in 2024, $ 3.15 billion in 2025, $ 1.5 billion in 2027, $ 1.25 billion in 2028, $ 1.4 billion in 2029, and $ 1.5 billion respectively. 

In this backdrop, yesterday, the lead story of this newspaper reported that of the 99 oil tanks in Trincomalee built by the ‘British Raj’, when Sri Lanka was a colony of the U.K., 14 will be leased out to Lanka Indian Oil Corporation plc (LIOC), a subsidiary of the Indian Government-owned Indian Oil Corporation Ltd. (IOC), on a 50-year lease, at a leasing price of US$ 1,000 per tank per annum, working out to an annual lease rental of $ 14,000.

Of the remaining 85 tanks, 24 have been leased out to the Government of Sri Lanka (GoSL)-owned Ceylon Petroleum Corporation (CPC) and the balance 61 tanks leased out to both the CPC and LIOC, which together will operate and function as a joint venture (JV) to manage those tanks, of which JV, CPC has a 51 per cent stake and under similar leasing payment conditions. 

US dollars paid by CPC and the CPC-LIOC JV may be discounted as they are either wholly GoSL-owned or 51 per cent (majority) GoSL-owned, by virtue of the fact that CPC is 100 per cent GoSL-owned. 

Therefore, dollars paid by the CPC and the JV in question to the GoSL will not uplift State coffers as they are akin to ‘Robbing Peter to pay Paul,’ but those paid by LIOC, will.

Therefore, what is, significant in this agreement is the debt free dollar accruals to the country from the LIOC lease arrangement alone. However, an annual rental of $ 14,000 from LIOC is peanuts in the context of the country’s multibillion dollar debt obligations. What Sri Lanka needs is not only more of such investments, but also of greater values, to keep the wolf, in the form of maturing foreign debt repayments due, at bay.

In the midst of  and complementing these unsavoury developments, Sri Lanka has an almost perennial, yawning trade gap, complemented by running deficits in the balance of payments (BoP) of its current account (C/A) as well as budget deficits. What run the deficits in the BoP in Sri Lanka’s C/A are its perennial trade deficits as the trade account is a sub component of the BoP in Sri Lanka’s C/A. 

To get over this morass on an immediate and on an urgent basis, the domestic economy has three serious sicknesses all in the form of deficits, to be treated, without further delay.  They are the trade, BoP in its C/A and budget deficits.

To treat the first two of these sicknesses, Sri Lanka needs non debt creating foreign inflows and in the case of the other, a revenue uplift.

The LIOC-Trincomalee tank deal is a miniature setting of treating two of the economy’s serious sicknesses. They are the country’s deficits in the BoP in its C/A and also of its budget. More of the country’s family silver like those 14 tanks to LIOC, need to be ferreted out and sold/ leased out to foreign governments and/or foreign corporate on an urgent basis, without harming the wellbeing of the masses.

Tourism services are showing signs of recovery, with tourism income earned last month alone amounting to $ 120.3 million from 89,506 visitors. But those alone are not enough. Much more needs to be done, considering that December is the peak tourism month for the country.

CEYLON TODAY | Published: 2:00 AM Jan 13 2022

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