Is debt necessary evil ?

A look at global debt statistics would show that almost all countries, irrespective of their economic status, obtain loans. The USA, the second richest country on the basis of PPP index, has a debt burden of more than 100% of their GDP, which is much more than some of the developing countries such as Brunei (1.7%) and Congo (12%). Russia, a developed country, has a debt/GDP ratio of 17% only. How much debt a country could take would of course depend on its ability to pay back. When the interest rate payable on the loans is lower than the growth rate of the national product, it is considered safe to be in debt. The interest/growth ratio in developed countries is maintained around 1, which is said to be safe with no fear of default. Donors too like to deal with countries that adhere to these parameters.

Obviously, poor countries have to take loans to engage in development work. But why would a rich country like the USA take massive loans. The US has debts amounting to 30 trillion which is 110% of its GDP. From year 2000 to 2019, the US debt increased by 69%. Japan and China are among the main lenders to the US, which owes Japan USD 1.2 trillion and China USD 1.1 trillion, and it has borrowed large sums from countries like Taiwan, Brazil, Belgium, etc. The US could settle these debts or take steps to reduce it, but it prefers to have deficit budgets and meet the deficit with loans. It does that because it can afford to, but there are American economists who say the heavy debt burden could cause a crisis.

If that is the case for the USA, obviously poor countries like Sri Lanka cannot afford to run debts in the range of USD 50 Billion. Our export earnings in 2018 amounted to USD 20 billion and imports cost USD 26 billion. The deficit had to be bridged with foreign loans. Even under crisis conditions we are spending more than we earn. In 2021, export earnings were USD 14 billion while imports cost USD 21 billion.

During the last decade or so interest rates for foreign debt was fairly low, and many developing countries made use of the opportunity to borrow heavily. This money, in many instances, was not utilised judiciously but spent on unproductive projects. As a result, those countries owe record amounts of money to foreign investors, governments and other lenders. For instance, Afghanistan, Chad, Bolivia and Zimbabwe owe an astounding USD 2.1 trillion. As many as 154 countries are in economic difficulty due to such short-sighted policies. Sri Lanka also belongs in this group. Tanzania, Lebanon and Belarus are almost bankrupt. Argentina has defaulted to pay its loans for the ninth time. Covid-19 has made matters worse as it has badly affected the dollar earning capacity of these countries. Sri Lanka in trying to solve the problem in 2020 took steps, such as tax cuts, fertilizer import ban etc. that made matters worse.

For the poorest countries (all those eligible for support from the International Development Association or IDA), 2020 debt service is about $36 billion, divided in roughly equal proportions between multilateral, bilateral (mostly non-Paris Club), and commercial creditors. Sri Lanka does not qualify for IDA assistance. There are worse- off countries than Sri Lanka, some consolation!

All developing country regions are potentially seriously affected: Latin America has the highest debt service/exports ratio, Africa has the least diversified export mix, East Asia has the largest absolute amount of debt service. In normal circumstances, these amounts would simply be refinanced in global capital markets or offset by new disbursements from existing lenders. But circumstances are not normal. Credit markets have tightened, and many countries are faced with very large reductions in foreign exchange revenues. In the face of huge global economic uncertainty, it is hard to predict which countries and regions will be most vulnerable. Already, Venezuela, Argentina, and Lebanon have defaulted and face lengthy and damaging legal proceedings with each creditor trying to negotiate individually, resulting in dead-weight losses for everyone until the situation is sorted out.

One indication that the problem is widespread is that already 90 countries have approached the IMF to access emergency financing. It seems clear that this is not just a low-income or Sri Lankan or an African country problem. There are several calls for debt standstills to ease the burden on developing countries. Debt threatens to create a global development emergency, in much the same way as the pandemic is creating a global health emergency. Both could result in social unrest and instability. Something will have to be done by the aid giving countries, but that doesn’t mean the responsibility of developing countries are less. They have to show greater commitment in controlling corruption, waste and in good management and transparency and accountability in all their dealings. Loans should not be wasted on unproductive projects such as Mattala Airport.

All these countries need time to recover. Many developing countries simply will not have the foreign exchange to service their debt this year, notably those who are heavily indebted, are commodity dependent (two-thirds of all developing countries according to UNCTAD), have relied on large tourism earnings, or on remittances. A good example of the value of buying time is the negotiated settlement of debts in Korea in 1997-98. Similarly, Sri Lanka and all the affected countries need time to put their house in order and slowly grind back to recovery.

In the current context, timeliness means that case-by-case solutions may not be feasible. Like COVID-19, there is a need to flatten the curve of debt reschedulings, so that the peak falls within the capacity of the country to handle the crisis. Hence there is a need for the G-20, the IMF/World Bank, the U.N. or others to develop a simple debt freeze framework, that can buy time for these stricken countries. Then the problem in each country could be analyzed and remedial action suitable for each country taken. There could be a UN Security Council Resolution calling for a standstill on payment of debt service and an agreement by all creditors to abide by the UN resolution. Such measures had been taken in the past during global debt crises.

Sri Lanka is somewhat better off than most of these badly affected countries. It is a fertile country with a good base for agricultural development. Its literacy rate is high and has an educated workforce. Its garment and tourism industries are fairly well-developed, and the potential for development of industries like electronics, IT and communication is fairly good. The geographical situation of Sri Lanka in the Indian Ocean is most favourable for the development of a trade and shipping hub. If our leaders stop doing foolish things, listen to genuine scientists and economists and focus on supplying the agriculturists, planters, fishers and industrialists their requirements to develop their sectors, the country has a good chance of recovery. Our economists, managers, CEOs and entrepreneurs are second to none in the world. If there is no political interference they have the knowledge and ability to deliver.

In the energy sector, the mafia that controls it must be got rid of, and solar energy must receive highest priority. More than half of our foreign exchange earnings go for import of fuel. The sun is the only source of energy the world has, the problem is we have not tapped its resources fully. Sri Lanka must seriously go into the business of researching and manufacturing solar power capturing equipment. These things could and should have been done with the big loans that the country took in the past.

In future, loans must be kept below 50% of the GDP and the ratio between interest rate payable on loans and GDP growth rate should be maintained at one or less. The present debt burden of USD 50 B should gradually be reduced to about 10 B. Loans should never be taken for consumption or unsustainable projects that do not benefit the people. No room should be left for corruption. Therefore, corrupt politicians would not like to adopt these policies. First we must elect incorruptible politicians.

N.A.de S. AMARATUNGA