Some advice for Sri Lanka’s establishment - Part 3 | Daily News
Getting out of a debt hole

Some advice for Sri Lanka’s establishment - Part 3

Sri Lanka is a bit like a Scottish castle and estate

Let me give you a little example to explain the strange problem Sri Lanka has that I described in the last section. When I first came to live in Scotland in 1979 as a young PhD student, one of the intriguing aspects of Scottish Life was the way large parts of Scotland were owned by landed aristocrats. These estates could even include mountains and rivers and often a castle too. This is a legacy of Scotland’s feudal past. Now the interesting thing was that quite often the estate did not actually manage to pay for itself.

The castle was sometimes in a dilapidated condition because the estate’s revenue was not enough to pay for its upkeep. The family that owned the estate was not bankrupt of course but they refused to sell some or all of the land as it had been handed down over centuries. As you can imagine the ordinary citizens of Scotland didn’t really feel sorry for these poor landowners.

The Central Bank of Sri Lanka.

That is what Sri Lanka looks like from the outside. We are a rich country with a huge value hidden inside. But we do not know how to deploy it. We are stuck with out of date thinking about sovereignty, and we have not yet understood how to fully open our economy and take part in the capitalist success enjoyed by the rest of the world.

Switching back quickly to those poor Scottish aristocrats, they learned over time how to get out of their predicament. They learned to open their castles to the public, make sure there was a nice tea room that had expensive cakes and tea, sell off bits of the estate to fund improvements to the castle etc.

Think about what that means for Sri Lanka. We can easily get out of our debt hole tomorrow morning by (a) changing the law to secure foreigners’ debts and (b) by selling off some assets to repay those lenders that want their money back now.

Should Sri Lanka default on its debt?

Absolutely not. Only sovereign countries can even contemplate defaulting on debt and getting away with it.

Let’s consider first what would happen in a normal debt scenario within a single country. If a UK borrower defaulted on his debt, the courts would ensure that his remaining assets are forcibly sold off to pay the debt and the borrower would be bankrupted. Once bankrupt that person would not be able to easily borrow again in the future. You get to be bankrupt only once! It is a pretty serious situation for any person to become bankrupt. If bankruptcy happens to a company, the directors of that company would be in a similar situation when it comes to any business they might attempt in the future.

Why is that different for a country? Well,a sovereign country could misuse its sovereignty to simply refuse to pay. There was a time when Western powers would send gunboats to sort out the situation, but these days lenders would simply cut-off that country, so it is not possible to borrow again in the future … for perhaps a very long time.

Stock traders monitor prices at the Colombo Stock Exchange.

Be very clear that to refuse to pay our debt is simply a form of theft. We would essentially be stealing money from the lenders. That is why it is not a great idea, and that is why lenders will not forget what we did.

Now a legitimate question for you to ask me here is this: I thought you said when we borrow money lenders simply print the money and give it to us. So why is it such a big deal if we simply refuse to pay? A good question indeed. Yes, that is absolutely right that when you borrow money the bank creates money and lends it to you, and when you repay, the bank destroys that money. But here is the kicker … if you do not repay and default on your debt the bank has to destroy that loss out of its own money. So, all bad debt becomes a real loss to the bank. To not repay is to steal from the bank. That is why Sri Lanka must not do that.

So the way forward is to sell assets? What about the IMF?

Selling Sri Lankan assets is indeed one way forward. In total there are three ways out of our debt hole. But none of those involve the IMF. Let us first talk about the IMF option. It is firstly important to note that the IMF is a misnomer. It is not an “international” institution in that the world’s population owns it equally or that the world’s countries control it equally. It is essentially a Western institution whose primary purpose is to protect the interests of Western lenders.

That does not make them bad – but we need to know why they exist and who they ultimately answer to.

There is a lot of noise in western newspapers about the China debt trap. But be in no doubt that all debt is a form of trap. If you owe US$1 to a bank and you are unable to repay that debt, the bank then controls you until you pay that debt (or your assets are dissolved to pay that debt and you are bankrupted). That has always been true and will always be true. In the battle of the debt traps be aware that our choice here is a Western debt trap or a China debt trap or an India debt trap. Debt is always a trap if you cannot repay it. Someone else dictates what happens to your assets at that point.

Let us talk a bit about China vs the West for a moment. Here is an interesting statistic that might surprise you. I mentioned the McKinsey study on national wealth earlier. China has now overtaken the US in terms of total national wealth according to the report.

On a “Purchasing Power Parity” (PPP) basis the report estimates total US wealth at US$89 trillion in 2021 (that is the “net assets” position of the US as a whole), while it estimates China to be US$201 trillion- which is more than double that of the US! Makes you think about where our borrowing should come from – but at the end of the day any debt that you cannot repay puts the country in a bad place and it doesn’t really matter whether it is China or the West that lends to us.

Back then to the IMF (or more accurately the WMF). The thing the IMF can do for us is to help us negotiate with our lenders and restructure our debt.

 

 

If this results in a prolongation of the debt repayment timescale, well we can probably achieve that ourselves by talking to the lenders directly.

We do not need the IMF for that. Be in no doubt that lenders’ real interest is to keep lending to us and continue to earn interest from that loan. That is how banks make money. The only reason they want us to repay now is because they are worried we may not be able to repay later. If the lender believes that we will absolutely repay, then guess what, they are no longer in a hurry to be repaid – more jam for them in interest paid.

So, debt restructuring is not where the IMF really helps. The IMF can help to make lenders take a “haircut”. What does that mean? A haircut has little to do with hairdressers but everything to do with making the lenders agree to lose some of the capital they lent us. Eg to agree that 20% of the debt need never be paid back and be written-off. This is of course a form of legitimised theft.

The IMF gets the lenders to agree to us “stealing” 20% of the loan in return for us paying back the rest of the 80%. As you can imagine, that’s not a nice place for the lenders to be in, and they will remember that and be far less keen to lend to us in the future. But in return for this official theft by us, the IMF usually imposes draconian rules on what the government must do to the domestic economy.

This as you can see is a lose-lose situation – and of course it needs to look like a lose-lose for the lenders to agree. The lenders lose some of their capital, the government is forced to follow the IMF’s diktats which are mostly rubbish (if they knew how to run a country, they would not be working for the IMF), and Sri Lanka goes a little bit deeper into a Western debt trap while Western politicians feel empowered to walk all over us.

Talk of losing sovereignty!

Even more crazy when you consider that Sri Lanka has its very own “Scottish castle” worth $400b that we refuse to mortgage or sell. Crazy crazy.

The IMF is absolutely not the way forward for Sri Lanka for one final massive reason. It is essential to understand the root cause of our debt problem which is of course Sri Lanka’shuge forex leak. I will talk about this in much more detail in the rest of this article but suffice to say here that if Sri Lanka did not have a persistent trade deficit (and current account deficit) we would not be in this situation. The years 2020 and 2021 were of course particularly bad for Sri Lanka due to Covid.

So although the IMF can give us short term debt relief, it will not fix our trade deficit. Sri Lanka quite simply buys much more in forex than we sell in forex. That’s the root cause of our long-term external debt problem. Going to the IMF will not fix that. The IMF will simply put a sticking plaster on our arterial wound and send us home –and Sri Lanka will continue haemorrhaging forex. The IMF will fully expect us to be back again in two years’ time asking for yet more debt relief. That is a debt-trap.

(Aravinda Korala is the Founder and CEO of KAL. KAL is the leading ATM software company globally and is headquartered in the UK. Aravinda obtained his BSC in Electrical Engineering from Kings College London and Ph.D. from the University of Edinburgh in Artificial Intelligence)

To be continued

 


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