Dollar Crisis: What aggravated it

by Eng. D. Godage

Total foreign currency reserves of the country were around seven billion dollars at the beginning of 2021 but it decreased to around 1.2 billion dollars towards the year end, even though the Central Bank announced that there was a reserve of three billion dollars. The net foreign assets of the total banking system are said to be a US$ 4.1 billion deficit by 2021 end. Everybody knows the suffering and difficulties the countrymen undergo as a result of the depletion of foreign currency or dollar reserves. Without elaborating on those effects, it is the intention of the writer to examine how foreign reserves depleted so fast.

Politicians, officials, public speakers very often tend to blame every government since independence over the past 70 years for ruining this country, but with regard to foreign debt, it is not applicable. Moreover, the effects of the COVID-19 pandemic were felt globally but other countries in this region did not suffer as much and face such crises like the ones faced by Sri Lanka, so it is no excuse. It is not essential to elaborate on this fact as it is common knowledge. Consequently, the writer makes an attempt to understand how and when it happened. The focus of this discussion is on infrastructure development, and not other debt instruments.

Debt burden since independence

The Oya project implemented around 1948 using local funds comes to mind. Moreover, from 1950 the major port development scheme of Colombo Harbour created the Colombo Port, one of the most modern ports at the time, by 1956 under the leadership of the Minister of Transport and Works, Sir John Kotelawala in the Dudley Senanayake Cabinet, utilising local funds amounting to 110 million rupees. While work was in progress, the ship ‘Gothic’, carrying Queen Elizabeth II, berthed alongside the newly constructed Customs Quay to christen it the Queen Elizabeth Quay (QEQ). Incidentally, the QEQ was buried in the privately developed SAGT or South Asia Gateway Terminals around year 2000.

The Mahaweli Development Project, a massive irrigation cum hydroelectric scheme originally planned for 30 years but telescoped into about six years, was undertaken by the J.R. Jayewardene government using concessionary loans as well as grants. Funds were provided based on a thorough feasibility study, with eminent engineer late Dr. A.N.S Kulasinghe and his team of engineers working as consultants. Resultant benefits are well known and they did not lead to any debt crisis in the country.

Road and railway infrastructure development has been carried out with locally raised funds. After the 2004 tsunami disaster, the Railway Department staff rehabilitated the destroyed line to recommence operations with the least possible delay. It is said that northern rail line improvements carried out later on loans under Uthuru Wasanthaya had spent two to three times the cost.

Since 1980 the country has seen another major development programme in the port sector. Studies had been conducted at a time of increasing demand for container traffic, confirming the urgent need to expand port facilities. The first phase of expansion, requiring US$ 32 million, was funded in the form of a Yen currency loan. The project progressed systematically aided by further loans, through a transparent bidding process. As a result, the Colombo Port was elevated from the global rank of 127 in 1981 to 21^st in 1997. These loans were granted only after proper feasibility studies were carried out and confirmation of loan repayment capability, as affirmed by the lending Japanese Agency. Extensive borrowing for project infrastructure became the norm only after about 2000 and not since independence.

Newer debt accumulation

A Sunday English newspaper on March 9, 2014 and May 1, 2016 reported, with details from the External Resources Department, on 28 projects funded predominantly by China Exim Bank loans amounting to US$ 7,671 million, with five-year grace and 10-year repayment periods; their interest rates are not indicated but is supposed to be over six percent. All these projects are said to have been initiated through unsolicited tenders. The same newspaper published a report under the caption, “Normal tender procedure not possible for mega projects: PBJ”. This is a questionable statement. Further examination of the above list shows seven projects, all in Hambantota, totalling US$ 5,054 million, for airport, port, highway extension, railway extension and local road network. None of them seem capable of generating revenue to repay the massive loans even though they have been in operation for around 10 years by now. These loans alone require about US$1 billion per year as repayment, burdening the country, and using up its dollar reserves. During the previous regime the Hambantota Port was given out on a 99-year lease.

Did the Treasury officials who handled these borrowings not see the danger of the debt burden or debt trap and the country’s inability to repay them without adequate future revenue? One can cite the shifting global financial structure and unforeseen circumstances as the reason. But they should have been taken into consideration in any plan. High costs due to unsolicited proposals without a competitive bidding process are also an issue. As for costs, the Treasury Secretary has said that it is the engineers who determine costs. This is not an acceptable excuse.

The Colombo Port South Harbour was found to be an urgent project, and proved viable after an extensive feasibility study by 2001. After producing detailed designs, cost estimates and all implementation requisites, it was not possible to proceed due to lack of funds. The Hambantota Port project was also given high priority by the same government though two feasibility studies failed to show the viability of the project. For the Colombo Port project, the Treasury Secretary advocated commercial borrowing claiming that the lending agency conditions were unacceptable.

In fact, only one lending agency came forward to offer approximately one third of the fund requirement. The Ports Authority managed to obtain very concessionary loan of US$ 300 million in 2006, to proceed with the project, albeit after a two-year delay. The new harbour was completed successfully within the stipulated time and cost while adhering to a transparent tender process. It is worthwhile to note that the lowest cost, approximately US$ 320 million, was quoted by the Korean contractor who successfully completed it, while the next bid was around US$ 570 million by a Chinese contractor. This project seems to be generating more revenue than budgeted.

In fact, the biggest container ship in the world ‘Ever Ace’, with a carrying capacity of 24,000 TEU, berthed in the Colombo South Harbour in October 2021 as it is the only port in the region that could accommodate a ship of that scale, bringing great honour and promoting the Colombo Port.

Most Chinese funded projects that commenced during the past two decades seem now complete and in operation, spread among power and energy, transportation, airport and aviation, ports, irrigation and water sectors. Debt distribution is US$ 1,553 million in power and energy, US$ 3.99 billion in transportation, US$ 232 million in airport and aviation, US$ 1,336 million in ports and US$ 101 million in irrigation. This includes projects indicated by the aforementioned 2016 news item, and subsequent major projects like the Central Highway are not included.

Expensive ventures like the Norochcholai coal power plant costing US$ 1,346 million have helped to meet the country’s energy demands and there has to be a post project evaluation to ascertain its financial gains and loan repayment capacity. Highway projects undertaken on expensive loans do not seem to generate enough revenue to meet dollar loan repayments. Although some benefits accrue, the post project economic and financial evaluations are not satisfactory. The highest revenue on a peak day on the Southern Highway has been 38 million rupees a day. Considering the average annual turnover minus the operation and maintenance costs it could take 100 years to repay loans. Authorities should perform a post project evaluation for the benefit of future planners.

Lessons to learn

This is history but should not be discarded, for the valuable information and data therein demonstrate the actual scenario and resultant repercussions. Decision makers and economic advisors to the government, especially of the Treasury and any other relevant officials could review them.

The debt burden has aggravated the dollar crisis during the past two decades. The COVID-19 pandemic during the past two years is not an excuse as other countries in the region too have faced the same but are performing better. The negative economic growth in 2020 and the considerable dollar debt burden, with the country’s reserves collapsing have not occurred suddenly. Severe import restrictions have made day to day life of the people inconvenient and led to the collapse of some domestic industries.

The worst is yet to come, as warned by the Secretary to the President, delivering a speech in Colombo, as reported by a Sunday English newspaper on 28 Nov. 2021. He was the Treasury Secretary during the past two decades, when China Exim Bank loans were signed to the tune of billions of dollars mostly for white elephant projects, The massive dollar debt seems the root cause of most problems faced today.