EN ROUTE TO GREECE?

The debt crisis in Greece was long known and predicted. But, it did happen. With elections ahead, is Sri Lanka heading the same way?

Dr. Indrajit Coomaraswamy, before he commenced his tenure as the head of that old fashioned institution at Janadhipathi Mawatha, was a frequent speaker at many business events in Colombo. One prediction he repeated resolutely went like this: Sri Lanka spends more than it can afford; we cannot continue this lavish behavior forever. If we don’t take action, we might end up being another Greece.

Economics is a dismal science, we know, but Dr. Coomaraswamy was surely not the most pessimistic economist in the land. It was not difficult to follow his reasoning. If the nation were a family, it was one with an unemployed father buying the children sweets with borrowed money. One does not have to be an economist to figure where this is going to end. Today, Dr. Coomaraswamy chairs the monetary board. I hope I do not embarrass him by making this observation; Hardly anything has changed since then and now. As a country, our income hasn’t risen by much. Spending continues. We borrow more. We waste more. We risk more. Our debt is massive, like the Seven Kingdoms of Westeros in the world’s most viewed TV series. They at least had a Jamie Lannister to fight wars to plunder gold for debt repayment. We have no Lannisters.

This is, in a snapshot, where we stand in January 2018, nearly eight years after the end of the 30-year conflict and nearly two and half years of the, so-called, coalition government, leaving a seven-month interim period aside. Where we would be in 12 months from now is anybody’s guess, but we have some clues.

First, what happened in Greece?

The Greek debt crisis commenced in 2008, as a consequence of increasing public debt. Even before it became widely noticed, investors feared the Greek economy was in trouble in two ways: the ability to repay the debt and substantial interest. The last straw was the global financial crisis of 2008. Greece suddenly found itself handicapped by a high level of indebtedness (around 177% of GDP at the end of 2014) and a large budget deficit (more than 13% of GDP). What worsened the crisis was the Greek government’s own efforts to conceal and present a rosier picture using notably a collection of off-balance sheet funds and financial instruments developed by an international investment bank in its attempt to enter eurozone.

The failure of few national infrastructure projects, snags in tax collection, an oversized military budget and its reliance on European structural funds were other causes of the Greek crisis. The tension in Greece came in three peaks. The first happened in 2010. To prevent the crisis reaching Portugal and Spain, eurozone countries and the IMF decided to financially assist Greece. An agreement in May 2010 provided for loans with strict conditions seeking a structural adjustment by the government of Greece. The second came at the beginning of May 2011, when Greece was once again appealing to the IMF and European community. The Greek government was under pressure then, with people protesting on the streets. In June 2011, a United Nations report directed a drastic reduction in fiscal deficits that threated jobs, social spending and left economic growth uncertain.

The third: tense negotiations took place in early 2015, with the election of a left-wing political party to the government, which had promised a programme hostile to reforms suggested by European authorities. The government of Aléxis Tsípras organised a referendum in July 2015 on the acceptance or rejection of the creditors’ plan, which received a ‘NO’. Nevertheless, a similar plan was accepted in the following days after bitter negotiations and was ratified by the Greek parliament. It wasn’t the end of the world, but the consequences were by no means palatable.

Why would Sri Lanka follow the same path?

The debt-to-GDP ratio in Sri Lanka was 79.3% in 2016, very high compared to other frontier markets and peer countries in the region. The Central Bank’s annual report not just makes that observation but illustrates the fact with comparisons. In India, it was 67.2%, Vietnam 59.2%, Malaysia 57.4%, Thailand 43.1% and Bangladesh 34%. In Indonesia, a country that stands in par with Sri Lanka in its per capita GDP, the debt-to-GDP ratio was just 27.3%. We have not come to the levels of Greece, but without stern measures, it wouldn’t be too long before we suddenly find ourselves in a mess we cannot easily get out of.

We are also making the same mistakes. One of Greece’s mistakes was colossal government spending. We too, like them, continue to run state institutions, heavily burdening the treasury. In 2016, Sri Lankan Airlines alone incurred a loss of Rs14.1 billion. We cannot be complacent about reducing the airlines’ 2014 loss of Rs29 billion by half. As somebody calculated, it would be more economical for the government to finance all Sri Lankan passengers’ travel on other airlines rather than running a national carrier. Other state institutions appear to justify their losses with ‘we did better than last year’, but the slip is still visible. Sri Lanka Railways made a loss of Rs6.8 billion. Ceylon Electricity Board made a loss of Rs13.2 billion. Only the National Water Supply and Drainage Board reported a marginal operating profit in 2016.

These figures will not vary for 2017, while their employees, especially the executives, receive compensation packages, some above market rates, with fat year-end bonuses. Some state institutions like the CEB are bound to pay annual bonuses to all employees using public money even if their performance is pathetic and when the organisation continues to lose money. Ironically, these are the very institutions that are supposed to fill treasury bins with their enviable position as monopolies. If the same organisations empty the treasury, rather than supporting it, the country has no other option than borrowing internationally at unfavorable rates.

The same Central Bank report also reveals that expenditure on salaries and wages in 2016 was Rs576.5 billion (nearly 5% of GDP). Salaries and wages paid to central government employees, including defence personnel, have seen a sharp increase mainly due to higher overtime and other allowances as a result of the commencement of the conversion of interim allowance to the basic salary with the implementation of the new salary structure from 1 January 2016 for public sector employees. The share of salaries and wages in total recurrent expenditure was 32.8% in 2016, the second-largest recurrent expenditure item. The fact that 2019 is an election year will not ease fears. Sri Lankan elections are famous for providing subsidies with resources that don’t exist. The hit will not be felt in the 2018-19 period, during which the government will try to soothe the difficulties, but we might possibly pay with arrears after the elections end. That will be the time we should most be scared of – simply because we know our governments too well.

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