You said there are three ways forward that do not include the IMF. Were you serious?
Absolutely serious!
We do not have to do them all – but they act over different timescales- so all three of these make sense. Here they are:
1. Fix our laws to give foreigners absolute ownership rights over Sri Lankan assets
2. Sell Sri Lankan assets
3.Fix our trade deficit with an Industrial Policy
The first of these is the quickest (but politically most difficult) thing to do. If our external debt can be secured against Sri Lankan assets that are guaranteed by law (and by that I mean it needs to be absolutely water-tight with an absolute constitutional guarantee that cannot be tinkered with by a future government), the pressure to repay our debt vanishes overnight. Here’s why:
Lenders make money by lending. They are not in a hurry to get their debt repaid if (a) the borrower continues to pay interest and (b) there is no risk whatsoever that the borrower will default.
Think about the US for a moment with its US$22 Trillion external debt. That is not just government debt but US institutional debt too. When will the US pay back all that debt? Actually never. There is no plan to repay any of that debt, but foreigners will continue to lend to the US. That is because if any of the US institutions default, the law provides recourse to the lenders to seize assets and recover the debt. That does not mean that individual debts are not being repaid. But as a total, US debt rises every year. Foreigners are happy to fund that because they can cash-in their loan anytime (e.g. by selling that loan to someone else) and they get interest payments while they hold US debt.
So here is the strange thing – not only do rich countries create more and more debt every year which they can never repay (and that debt circulates as “money” in the economy), if they ever tried to repay that debt the economies would simply have too little money and there would be massive deflation. It is crazy but true that economies need to create more and more debt to ensure there is enough money to run the economy. When Western banks did not create enough debt in the last few years (or in Japan’s case in the last 20 years), western central banks had to print money – famously known as Quantitative Easing to stop a deflationary spiral.
Even though Sri Lanka is nowhere near as rich as the West we could join the same benign pool of money creation if we (a) make the Sri Lanka Rupee fully convertible and (b) guarantee property rights independent of nationality.
If we did this tomorrow, our debt problem would be permanently and immediately banished. But just doing part (b) would solve our immediate issue. It would remove the urgency for lenders to be repaid.
They would be happy to simply delay repayment while we pay interest, knowing that their capital is bullet proof and safe. They will also understand that Sri Lanka has entered a new era of fully joining the world economy, and that would mean the US$400b of assets will appreciate a lot faster in future. A very virtuous circle to get into.
10. Sell parts of Sri Lanka’s “Scottish castle”
As we discovered earlier, Sri Lanka as a country has a balance sheet with US$ 400b of assets and US$ 50b of external debt resulting in a net assets position of US$350b.
As I said in the previous section the first easy way out of our debt dilemma is to simply change the legislation around the ownership of Sri Lankan Assets.
An alternative is to sell parts of our “Scottish Castle”. For example, sell prime beach property to a foreign hotel chain and give them freedom to develop it. Sri Lanka plans to sell property in Colombo Port City as far as I understand it. Totally right too, and we should be doing that asap. Economynext says that the initial land sales for just 20 plots of land are estimated at US$5b.
Let’s take a few minutes to consider the Port City project. There is a lot of nonsense written about it being a China debt trap and a waste of money. Just a little moment please. The land reclamation project cost Sri Lanka $0.9b which created land worth $5b in phase 1 and a total sellable land value of US$15b. All those people who have complained about this project – how many of you have invested US$1 and got back US$15 a few years later? This was a totally brilliant project in my opinion and only the Government could have done this. Some people think that this type of idea should be left to private companies – well really? Could a company have simply created an island off the Sri Lankan shore with no government help?
In the longer term once the Port City is fully built the total amount of wealth created by it will probably exceed US$ 100b (my estimate). And you know what, we could do it again one day in the future and have a second island, and then a third.
The beauty of Port City is also the ability to set the property laws to be investor friendly like I said in the section above. So, I accept that Sri Lanka may not want to free-up property laws across the whole of the country and make our Scottish Castle fully part of the world economy – fine. But please Sri Lanka, do get that right for Port City. We must make sure that ownership rights are absolutely guaranteed by law, independent of the nationality of the owner.
11. Tackling Sri Lanka’s persistent trade deficit
Sri Lankans apparently like the good life. And so, they should! If we want to buy an iPhone or a Mercedes Benz and we can afford it, we should be able buy it just like the rest of the world. But here’s the rub – we also as a country need to sell things back to the rest of the world! Otherwise, we have a trade deficit and a negative current account balance which means a persistent forex problem. That is where Sri Lanka is today.
Take a quick look at the current account balance for Sri Lanka. The “current account” of a country covers all forex movements – not just the trade deficit, but it captures money remittances and all foreign exchange movements.
SEE GRAPHIC 1
You can see the problem - we have a sea of red ink. Sri Lanka is constantly spending more forex than it earns, and so has to borrow forex to pay for imports. This obviously cannot keep going forever – the country will simply have bigger and bigger debts to pay.
Now fixing the trade deficit is not easy and will take time. Unlike financial engineering with asset sales and property freedom that I outlined above, fixing the trade deficit takes a lot more effort and much more time to achieve. But once we do that, we are finally out of the foreign debt problem–and permanently so.
The Sri Lankan establishment talks about self-sufficiency in turmeric or in rice. That is crazy. We need to be self-sufficient in forex. That’s all. Once we have done that, we can buy whatever we want–a Mercedes Benz, or maybe even as much turmeric as we want ..!
As the famous Scottish Economist Adam Smith wrote in his Wealth of Nations published in 1776, countries must focus on their competitive advantage.
We really must learn from Adam Smith, and from Singaporea country that is a perfect example of how to focus on competitive advantage. Guess what – Singapore does not need to worry about turmeric – they just buy what they want. Singapore has had a current account surplus of around 20% of GDP for nearly 30 years.
SEE GRAPHIC 2
Once you have a permanent positive forex situation the country has true sovereignty. There is no need to worry about external debt. It does not mean you do not have debt – in fact Singapore has an external debt of 501% of GDP secured against its many assets ($3.3Tgross).
So how do we become Singapore? Sri Lanka needs to start selling to the world what the world wants to buy. Tea, rubber and coconut alone will not do it.
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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