The country’s dollar crisis: what has worsened this situation? | Print edition

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By Eng. D. Dildo

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Inside a currency exchange office.

The country’s total foreign exchange reserves were around $7 billion at the start of 2021, but slumped to around $1.2 billion by the end of the year, even though the Central Bank announced 3 billions of dollars in reserves.

The net foreign assets of the entire banking system would be in deficit by $4.1 trillion at the end of 2021. Everyone knows about the sufferings and hardships that people experience due to the depletion of foreign exchange reserves or of dollars. Without speaking or elaborating on these effects, I intend to examine how the foreign reserves vaporized so quickly.

The coronavirus pandemic has affected every country in the world, but countries in this region have not suffered and are facing such crises as this country, so it cannot be taken as an excuse. It is not essential to dwell on this because it is common knowledge.

Debt burden since independence

Even though there is a tendency to blame every government since independence for creating the debt crisis, this is not the case. The immediate memory evokes the vast irrigation system, Gal Oya, set up around 1948 thanks to local funds. Then, from 1950, the major port development project of Colombo Port creating the most modern Colombo Port by 1956 using local funds amounting to Rs. 110 million as recorded.

The Mahaweli Development Project, which is a massive irrigation and hydropower project originally planned for 30 years but contracted and accelerated to around six years by the JR .Jayewardene government, used concessional loans as well as subsidies. The financing had been made after carefully carried out feasibility studies and the eminent engineer Dr. ANS Kulasinghe and his team of engineers working as consultants. The resulting benefits are well known and never seem to have created a debt crisis in the country.

The development of road and rail infrastructure is known to progress smoothly with local funds. After the 2004 tsunami disaster, Department of Railways staff rehabilitated the destroyed line to resume operations with the least amount of delays. Improvements to the northern railway line later made using loan funds under Uthuru Wasanthaya are said to have spent 2-3 times the existing prices and it is unclear who is to blame.

From 1980, the country experienced another major development program using concessional loans from the Japanese government in the port sector. Studies were carried out at a time when the demand for container traffic was increasing, confirming the urgent need to expand port facilities. The first phase of expansion requiring $32 million had come in the form of a yen loan. The project had been progressing systematically with new loans following a transparent bidding process. The achievement recorded was the elevation of the Port of Colombo from 127th in the world in 1981 to 21st in 1997. These loans were received only after proper feasibility studies and confirmation of loan repayment capacity.

Not all loanwords are examined, but only those that come to mind are examined to illustrate the misconception applicable to 70 years since independence. Significant borrowing for project infrastructure appears after about the year 2000 and no more than 70 years since independence as some claim.

New accumulation of debts

A Sunday newspaper from March 9, 2014 and May 1, 2016 reported details from the Department of External Resources listing 28 projects financed mainly by China Exim Bank loans amounting to $7,671 million, with a period of grace of 5 years and a repayment period of 10 years whose interest rates were not indicated. but supposed to be above 6%.

All these projects would have been the subject of unsolicited calls for tenders. The same newspaper reported: “Normal bidding procedure impossible for megaprojects: PBJ”. This is a questionable statement.

Closer examination of the above list showed seven projects, all in Hambantota totaling $5,054 million, for airport, port, highway expansion, railroad expansion, local road network, etc. None of them seem to be generating revenue to pay off the massive loans even though they have been in operation for about 10 years now. These few loans would have required about $1 billion a year to repay and burdened the country using up dollar reserves. Under the previous regime, the port of Hambantota was handed over on a 99-year lease, almost sold out, to China and the resulting debt relief is unclear.

Didn’t the Treasury officials who managed these borrowings see the danger of the debt burden or the debt trap and the inability to repay them without adequate future revenues? One can discuss the changing global financial structure and unforeseen events. This should have been included in all plans. High costs due to unsolicited bids without competition are also a problem. Regarding the costs, the Treasury Secretary had said that the engineers decide the costs and we know who to blame. This is not an acceptable excuse.

To expose the above misconceptions, the following illustration is presented: Colombo Port South Port was found to be an urgent, essential and viable project, proven after an extensive feasibility study in 2001. After detailed designs, cost estimates and all required implementation documents, it was not possible to proceed due to lack of funds. The Port of Hambantota project also received high priority from political authorities at the same time, although two feasibility studies did not show clear viability.

For the Colombo Port project, the Treasury Secretary advocated commercial borrowing stating that the terms of the lending agency were unacceptable. In fact, only one lender showed up offering about a third of the funds needed. The persuasion and conviction of the lending organization by the Port Authority had made it possible to obtain a very concessional loan of 300 million dollars in 2006 to proceed but with a delay of 2 years on the project. The new port was very successfully completed within the stipulated time and cost while adhering to a transparent bidding process. It should be noted that the lowest price accepted was around $320 million from a successful Korean contractor who completed it, while the next bid was around $570 million from a Chinese contractor. This project seems to be generating more revenue than expected over the last few years of activity.

Most of the Chinese-funded projects that have emerged over the past two decades now appear to be complete and operational, split between the power and energy, roads and transport, airports and transport sectors. aviation, ports, irrigation and water. The breakdown of the debt is $1,553 million in power and energy, $3.99 billion in roads and transport, $232 million in airports and aviation, $1,336 million in ports and $101 million in irrigation.

An expensive venture like the Norochcholai coal-fired power plant, which costs $1,346 million, has helped meet the country’s electricity demands and there needs to be an ex-post assessment to understand its financial gains to the country and the people. repayment aspects of the loan. Road projects undertaken with expensive loans do not appear to generate high revenue to meet dollar loan repayments. Although the travel time is reduced to half or one third of the normal time, and the travelers are satisfied, their post-economic evaluation and financial evaluation are not seen.

Given the average annual turnover and operating and maintenance costs, repayment of the loans could take 100 years, although its lifespan is much shorter. The authorities should carry out an ex-post evaluation for the benefit of future planners.

Lessons for the future

It’s history, but it shouldn’t be discarded, as the valuable information and data contained therein demonstrates the true storyline and the resulting repercussions. Government policy makers and advisers, particularly the Treasury, and any other relevant officials could review them.

The lending burden that caused the dollar crisis has worsened over the past two decades. The corona outbreak in the past two years is no excuse, as other countries in the region have also faced the same but are performing better. The negative economic growth in 2020 and the huge dollar debt burden with the country’s reserves collapsing was not a happy scenario and not a sudden event.

While Sri Lanka’s economy is going from bad to worse with the US dollar crisis and the severe tightening of import restrictions, the country has yet to see unimaginable days; this was stated by the Secretary to the President during a speech in Colombo as reported in a Sunday newspaper on November 28, 2021.

He served as Secretary of the Treasury for the past two decades, mostly during which China Exim Bank loans were signed for billions of dollars, mostly on white elephant projects, and so that can you imagine more. The economy cannot be a day-to-day juggling to balance interests. Incidentally, the collapse in tourism is linked to the corona pandemic, but not to the drop in foreign remittances. Massive dollar debt seems to be the source of most of the problems today.

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