Anura Kumara Dissanayake, also known as AKD, the unwavering leader of the NPP and potential Presidential candidate, has garnered attention for his noteworthy statements in Matara regarding the country’s public debt. Employing a subtly sarcastic tone, AKD has highlighted Sri Lanka’s public debt, which he deems relatively insignificant, amounting to $41 billion. He juxtaposed this figure with South Korea’s exports of $685 billion (sic) and the USA’s R&D investment of $623 billion (sic), insinuating that the debt could be easily repaid if the NPP assumes power and implements its own comprehensive economic recovery programme.

The statements made by the NPP leader contain inaccuracies on several fronts. The actual outstanding debt of Sri Lanka is currently estimated to be in the range of $90 billion, which is significantly higher than the mentioned figure of $41 billion. Then, the comparison drawn between one country’s debt and another country’s exports or R&D investments makes little logic—in fact, the Korean and USA data he presented appears outdated too; a simple Google search indicates higher figures. Even if we were to entertain the comparison, it would be misleading to suggest that repaying $90 billion is an easy task, particularly for an economy that is valued at $77 billion. It would be beneficial for the economic experts within the NPP, if there are any, to offer better insights to their leader regarding these matters. 

If AKD were the sole proponent of this line of thinking, I would have promptly disregarded the remark. Generally, I don’t consider politicians’ opinions to be particularly noteworthy to comment on. However, Dissanayake’s perspective is not unique to him. There are many others – some of them mainstream economists – who share the belief that Sri Lanka can overcome its challenges with relative ease. This sentiment is largely influenced by the current state of “economic stability” we are experiencing. As of now, the exchange rate of the Sri Lankan Rupee against the US Dollar is on the slide. At the time of penning this, the buying rate of a USD is Rs302. Although we still face high tax rates, life has almost returned to a state of normalcy. There are no longer long queues for fuel stretching for kilometres, and the days of enduring 12-hour power cuts are behind us. It is only natural for individuals to feel optimistic about a future free from such inconveniences. Some even go so far as to speculate that the recovery has already begun. This perception aligns with the government’s desired narrative, for obvious reasons.    

Have we so quickly recovered from the worst economic crisis the country has faced since the coffee crisis when the Coffee Leaf Rust hit Sri Lanka’s coffee plantations, causing widespread destruction in 1868? Or is this what some call the temporary tea break in hell? 

Let’s first get into the issue of debt. Similar to commercial enterprises, countries also frequently engage in borrowing. This does not necessarily indicate a lack of funds; rather, debt financing can be advantageous for a country, just as it is for a private firm. To illustrate this, let us consider an extreme example. As of December 2023, Singapore had a national debt of $872 billion and a debt-to-GDP ratio of 171%, which ranks as the 6th highest in the world on the second account. However, a closer examination of Singapore’s net national debt reveals that the country has no outstanding debt at all. The distinction between gross national debt and net national debt lies in the fact that gross debt only takes into account the amount that net debt deducts from the total, such as cash, shares, debentures, and bonds held by the country. Since the value of the Singaporean government’s assets outweighs its debts, the country boasts a near-zero net debt-to-GDP ratio. Therefore, if someone were to claim that Singapore can easily repay its “minimal” national debt, it would be difficult to disagree.

Repayment of Sri Lanka’s $90 billion debt is a different case altogether. Imagine an autowallah who enters into a 5-year lease agreement for a second-hand auto valued at Rs1.2 million. As part of this arrangement, the autowallah is required to make monthly premium payments of approximately Rs25,000. Under normal circumstances, this financial commitment can be managed, allowing the autowallah to save around Rs1,000 per working day. However, let us now envision a scenario where the vehicle is involved in an accident, abruptly halting the autowallah’s income. As a result, the monthly lease payments become an additional burden. In this situation, the autowallah is faced with two options. One option is to invest a substantial amount in fully repairing the three-wheeler. The other option is to seek an alternative occupation that would generate a comparable income. Failure to pursue either of these options would result in the autowallah remaining in debt, unable to overcome the financial strain.

AKD probably has no idea that Sri Lanka is that poor autowallah now. Its case is classic. Sri Lanka has faced significant challenges in its economic development following a thirty-year-long war. While neighbouring countries have made strides in their progress during this time, Sri Lanka had to wait till the end of the conflict to effectively utilize the opportunities. The end of the war in 2009 has brought some hope. It was quickly gone. One prominent issue then was the country’s approach to infrastructure development. While investing in infrastructure can be beneficial for a nation’s growth, Sri Lanka has struggled to capitalize on these investments. Infrastructure was there, but there was nobody to use them. For instance, the Mattala International Airport and the Magampura Port, both developed at great expense, have failed to attract airlines and ships respectively. This has resulted in a substantial waste of resources.

This was not the only mistake. When the public expressed concerns regarding the lack of tangible outcomes from these investments, the government resorted to suppressing dissent rather than addressing the underlying issues. Instead of opening up markets and fostering economic growth, Sri Lanka has increasingly relied on borrowing, often at high interest rates, to finance populist measures aimed at appeasing the masses. This pattern of excessive borrowing and short-term thinking has persisted across different governments and leaderships. Consequently, it is not surprising that the country experienced an economic crisis.

It almost appears as if Sri Lanka was inadvertently planning for this crisis between 2010 and 2022 through its actions during this period. If someone were to think that paying off the debt amassed in this time frame could be done so effortlessly for an economy worth less than $100 billion that struggled for decades to close its budget deficits, I would suggest starting with a four-month certificate programme in Financial Management. 

Back to the autowallah we are familiar with. During the COVID-19 pandemic, financial institutions implemented a temporary suspension of lease charges. However, after six months, individuals were taken aback by a significant increase in their monthly premiums. Notably, the interest accrued during the relief period was added to the principal amount, exacerbating the financial burden. 

Sri Lanka’s debt landscape mirrors this situation, as the country is currently benefiting from a relief period while simultaneously witnessing a continuous rise in commercial debts. Consequently, once repayments commence, the Sri Lankan economy will face a substantial strain. The potential solution of debt restructuring offers an extended repayment period, acknowledging the impracticality of short-term repayment. This indicates that recovery efforts will undoubtedly be long-term rather than short-term. Furthermore, this scenario is contingent upon Sri Lanka refraining from acquiring additional significant loans during the recovery period. Anyone anticipating a recovery period of fewer than ten years is engaging in wishful thinking.

Greece, a nation that experienced more substantial assistance, underwent a decade-long process to achieve recovery. The Greek crisis emerged in late 2009, stemming from the global financial crisis and inherent weaknesses in the Greek economy. This crisis eroded confidence in Greece’s economy, as evidenced by widening bond yield spreads and an increase in the cost of risk insurance on credit default swaps compared to other Eurozone countries, notably Germany. To address the crisis, the Greek government implemented 12 rounds of measures, including tax hikes, spending cuts, and reforms, between 2010 and 2016. These measures, at times, led to local unrest and nationwide protests. Despite these efforts, Greece had to seek bailout loans in 2010, 2012, and 2015 from entities such as the International Monetary Fund, Eurogroup, and the European Central Bank. Additionally, in 2011, Greece negotiated a 50% reduction in the debt owed to private banks, amounting to a debt relief of USD 100 billion.

Sri Lanka has not received, nor is it expected to receive, a comparable level of support. Considering this, it is reasonable to question the basis for asserting that Sri Lanka would achieve a quicker recovery.

Initially, there was a prevailing expectation among economists that Sri Lanka’s repayment obligations would decrease significantly, potentially by half or more, through the process of debt restructuring. There was also speculation about the possibility of debt write-offs, commonly referred to as “hair-cuts.” Regrettably, the current reality reveals that neither of these anticipated outcomes will materialize. Sri Lanka is still faced with the need to allocate $3.5 – 4 billion annually for debt repayments, which must be earned in foreign currency. Unfortunately, Sri Lanka has yet to formulate a comprehensive strategy to address this challenge. Similar to the experience of Greece, it is possible that supplementary bailouts might become necessary. This juncture underscores the importance for Sri Lanka to proactively plan for the future. Without doing so, relying solely on hopes for a swift recovery will prove futile in moving forward.

There is a significant risk that Sri Lanka faces in meeting the IMF targets in the coming years. This upcoming round of negotiations could potentially be the final opportunity for the country to satisfy the IMF’s expectations. The repercussions of failing to meet these targets would result in a regression to a state even worse than the initial starting point. Therefore, it is imperative that we approach the recovery process with utmost seriousness and refrain from trivializing it during political gatherings.