Aid, So Near, But Yet So Far
Receipt of aid, both in the form of grant aid and concessional aid, like in the good old days, would give an impetus to development.
When there are roads, power plants and power connections, water supply and sewerage facilities and such like built, that would also give a fillip to investments and therewith job creation and enhanced production, leading to increased earnings.
This sort of aid driven development, with factories and industries following, was visible, especially in the period 1977-82, when the island opened up its economy, a period when Sri Lanka also had a soaring unemployment rate of over 20%.
The progress then started was however dented with the outbreak of the July 1983 disturbances and Sri Lanka’s 26 year old long drawn out debilitating terrorist war which followed thereafter, and which ended only three years ago.
Are there any other reasons why aid to Sri Lanka has been reduced to a trickle other than the fact Sri Lanka has reached middle income status? An excuse touted, both by the Government of Sri Lanka (GoSL) and by the donor community.
If that be so, ie the island reaching “middle income” status being the cause of the drying up of aid, then how is it that countries that are far richer than Sri Lanka, especially those in the Euro zone and which are in the throes of the euro debt crisis and high budgetary deficits, get far greater volumes of aid than Sri Lanka?
The “poorest” of those countries like Greece which is receiving massive bailout sums (from the IMF and the European Central Bank) has a per capita GDP which is 10 times higher than that of Sri Lanka’s!
According to the Central Bank of Sri Lanka’s (CBSL’s) 2011 Annual Report, per capita GDP at market prices in the island last year was US$ 2,836.
And according to the internet (Global Property Guide), the per capita GDP of some of the key, debt straddled euro zone countries which are being bailed out or rumours of being bailed out by the EU and IMF were: Portugal (US$ ($) 22,699); Ireland ($ 48,517); Italy ($37,046) Spain ($ 33,298) and Greece ($ 27,875).
These euro zone nations are known by the acronym PIIGS (Portugal, Ireland, Italy, Greece and Spain).
Considering the fact that Sri Lanka borrows from China for its various development works at interest rates varying from 6-8%, the interest cost of these bailout packages pertaining to PIIGS may be deemed as concessionary relative to Sri Lanka’s borrowing rates charged by China, one of the island’s key lenders.
According to the internet (ie thestaronline, BBC News Europe, SETimes.com, PressTV and RT QUESTION MORE respectively), Portugal’s interest cost in its bailout package is 5.7%, that of Ireland’s (between 3.5-4%) and that of Greece’s (4.2%), all lower than the 6-8% interest cost charged by China for its various project loans to the island. Rumours of Italy and Spain too seeking bailout packages are yet to be confirmed.
Further, the value of the lowest of those bailout packages to those “rich” countries were almost twice that of Sri Lanka’s GDP, while the largest, to that of Italy (which however needs to be confirmed), is more than 10 times the value of the island’s GDP.
As per reports, the EU has agreed to a bailout package totalling $ 110 billion for Portugal, $ 113 billion for Ireland, euro 600 billion ($ 780 billion*) for Italy (to be confirmed), euro 130 billion ($ 169 billion) for Greece and rumour of a euro 500 billion ($ 650 billion) bailout package for Spain.
Each of these bailout packages are easily more than the size of Sri Lanka’s GDP. According to CBSL, Sri Lanka’s GDP at market rates last year was Rs. 6,543 billion. CBSL said that the annual average exchange rate last year was Rs. 110.57 to the $**, on that basis the Island’s GDP in $ terms works out to $ 59.2 billion.
According to the internet, the respective GDPs of Portugal, Ireland, Italy, Greece and Spain were $ 229 billion, $ 211 billion, $ 2,050 billion, $ 301 billion and $ 1,400 billion. As such the bailout packages as a percentage of their respective GDPs work out to 48%, 54%, 38%, 56% and 46%.
On a percentage perspective, in respect of a bailout package to GDP, the lowest is that rumoured to have had been made to Italy, namely equivalent to 38% of GDP ($ 780 billion). Meanwhile 38% of Sri Lanka’s GDP amount to a mere $ 22 billion. According to CBSL, Sri Lanka’s concessional external debt as a percentage of total government external debt, accumulated over the years comprised 63% or $ 15 billion as at end last year.
CBSL in its 2011 Annual Report also said that “Government, medium and long term inflows” last year amounted to $ 2,029 million. Assuming that, of this, only the Chinese component was commercial ($ 408.9 million according to CBSL’s 2011 Annual Report) and the rest concessional , then the concessional aspect of those loans is equivalent to $ 1,620.1 million or 2.7% of Sri Lanka’s GDP, a far cry from the 38% of rich Italy’s GDP, rumoured as being the bailout package earmarked to that country, or for that matter, the 56% of GDP bailout package to that of Greece.
It may be argued that due to the possible systemic risk posed to the economies of the EU, with wider ramifications to the rest of the world, is the reason behind such a huge bailout package amounting to some $ 1,822 billion in total or 31 times that of Sri Lanka’s GDP that has been proposed to PIIGS.
In contrast, the equivalent of 2.7% of the island’s GDP (it may very well be less than that figure as it was assumed that only the Chinese quantum was commercial, while the rest was concessional), presumed to have had been the value of concessional aid received by Sri Lanka last year is peanuts compared to what has allegedly been proposed to PIIGS by the EU and the IMF.
But it was only three years ago that Sri Lanka emerged victorious from a 26 year old debilitating terrorist war. In that context one would have had expected greater international support for its reconstruction and development works than the “crumbs that fall from off the master’s table” that it’s currently getting.
In fact grant aid, according to CBSL, declined by 10.5% to Rs. 15.1 billion last year!
Under those circumstances where did Sri Lanka go wrong?
Was it because of Sri Lanka’s poor handling of its relations with its key donor countries, namely the West and Japan, the reason as to why concessional and grant aid to the island is so few and far between nowadays?
One constraining factor in this regard is the country’s human rights (HR) issue, reflected by the recent loss of the GSP + duty free facility in exports to the EU region. And the continuous abduction syndrome with the culprits getting away without being apprehended, also doesn’t help to strengthen the Government’s bona fides on the HR issue with its key international development partners either.
In regard to the recent abduction of a JVP dissident duo, one of whom is an Australian citizen, a powerful GoSL official (not from the External Affairs Ministry) had to eat his own words when the Australian High Commission here voiced its concerns.
His retort then to the High Commission was to submit details of the abductee. After this was done, the two abductees were mysteriously released with the Australian citizen hurriedly packed off to “Down Under.”
Under these circumstances to whom does the finger of these abductions point to? To GoSL and to its agents? That’s anybody’s guess!
Other middle income nations get at least bilateral aid (see the Nigerian story in this publication’s last week’s business pages), but Sri Lanka none!
And what about the “Arab Spring” countries? IMF Managing Director Ms. Christine Lagarde, speaking at the recently held IMF-World Bank Annual Spring sessions in Washington, DC, promised to unveil an aid package to these countries when they once more meet at Tokyo later during the year.
Most of those “Arab Spring” countries have a per capita GDP which is at least equivalent, if not more than that of Sri Lanka’s. Also the G7+ fragile states (like Nepal for instance) which too like Sri Lanka have just emerged out of conflict, but which has won international goodwill from countries such as the USA, UK, Sweden, Denmark, Netherlands and Australia to lead them out of the morass? (See also The Sunday Leader business pages of its last week edition)
Where did Sri Lanka miss the bus?
Unless GoSL get its act right, the loss of the GSP + duty free facility in August 2010 followed by Sri Lanka’s defeat at Geneva’s HR sessions in March, may be a harbinger of worse things to come, at least from an economic perspective.
Interest Rate Pressure
Last month (April 5, 2012) CBSL raised its key policy rates ostensibly to curb rapid credit and import growth which have a bearing on inflation and on the island’s balance of payments position respectively.
Higher inflation hits the poor and the fixed wage earner the hardest, when prices, especially of those that are essential rise, and when their incomes are static, thereby finding it difficult to make ends meet.
On the other hand rising rates make borrowings expensive, which may have a knock on effect on investments, and therewith job creation and also on increased production, a conduit to provide more revenue.
However that may be, CBSL raised its reverse repo rate, the rate at which it lends to banks for a day by 75 basis points (bps) to 9.75% and its repo rate, the rate at which it pays banks for parking their excess liquidity with it, by 25 bps to 7.75% on April 5.
Such rate hikes also do have a cascading effect on market interest rates. As it’s, according to CBSL data, commercial banks’ average weighted prime lending rate, ie the rate charged on blue chip borrowers, as at April 27 had increased by 393 bps year on year to 12.90%.
Similarly, commercial banks’ average weighted fixed deposit rate in the review period has had increased by 167 bps to 9.84%, indicating that banks were facing a liquidity crisis ostensibly driven by high credit growth, hence the reason for the jacking up of rates in order to attract liquidity into the system to feed credit demand.
A manager of a lending institution referring to current market conditions told this reporter that the situation was looking grim in the backdrop of rising rates. He said that rates were on an upward swing, almost similar to the higher interest rate regime that prevailed when the war was on.
“We have not yet got into that situation (the environment of a high interest rate regime)but we are getting there,” he said.
A high interest rate regime dampens investments due to high borrowing costs which act as a deterrent. That in turn stultifies employment growth and affects factory output, therewith hurting revenue enhancement as well. A high interest rate regime also raises the possibility of financial institutions finding their non performing loan (NPL) portfolio increasing due to borrowers’ inability to service their debts because of the higher costs involved. An increasing NPL portfolio not only threatens the stability of the affected financial institution, but if that institution is of systemic importance, it may also threaten the stability of the financial system as a whole.
“A high interest rate regime actually hurts those at the ‘bottom of the pyramid,’ those at the start of the supply/value chain,” the source said. For instance a school van driver may increase his fees to cover his higher leasing and/or diesel costs***, so it’s the end user or the consumer who pays for such fees who will have to bear the brunt of this increase and not the van driver due to the “pass on” effects of such increases, he said.
The other day, ie on April 3, IMF’s Resident Representative Dr. Koshy Mathai speaking to reporters about the gravity of the problem said that “we now see pressure for wage hikes,” a natural consequence of which is due to the aforementioned example dished out by that manager of the financial institution. A wage hike however may cause demand driven inflationary pressure on the economy which may negate the very purpose of a rate hike, or rather, cause a second round rate hike to arrest new inflationary pressure in the economy due to salary increases.
However the danger in such consecutive rate hikes is its impact on investments and the attendant evils that such a situation would give rise to.
So, in a way, Sri Lanka is at crossroads at this juncture. Beefing up its commitments to the international community in this era of globalisation may be the only avenue of hope left for it to follow at this point of time to ensure political, social and economic stability in the short, medium and long term, despite the fact that it ended its 26 year old debilitating terrorist war three years ago. Sri Lanka, the darling of the West in 1977, has now become its pariah! Let not GoSL open “Pandora’s Box,” ie only to find one monster being replaced by another!
*one euro=US$ 1.3
**It’s currently around Rs. 130 in interbank spot trading
***In February Government raised fuel prices, with a litre of diesel going up by Rs. 31 to Rs. 115, petrol by Rs. 12 to Rs. 149 and kerosene by Rs. 35 to Rs. 106.