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ABSTRACT
This paper examines the challenges middle-income countries face in the new development finance landscape as the overall costs and risks of a debt portfolio rises. Sri Lanka’s debt financed infrastructure push did not generate the envisaged economic growth. Inadequate debt management, policy deficiencies, and weak governance contributed to deliver low investment returns, exacerbated by the ability to borrow large sums up-front without conditions or questions on the fundamentals of government economic strategy. The paper also finds IMF conditionalities for course correction can lead to a cycle of further debt accumulation and worsening debt indicators, at least in the short run.
Notes
1. IMF, “Fiscal Policy,” 6.
2. Clements, Bhattacharya, and Nguyen, “External Debt,” 4.
3. Reinhart and Rogoff, Growth in a Time of Debt; Herndon, Ash, and Pollin, “High Public Debt”; and Égert, “Public Debt Threshold”.
4. Pescatori, Sandri and Simon, “Debt and Growth,” 14.
5. Kumar and Woo, “Public Debt and Growth,” 4.
6. Chudik et al., “Debt-threshold Effect,” 6.
7. IMF, “Infrastructure Push,” 76.
8. OECD, “New Development Finance Landscape”.
9. Araujo et al., “Non-FDI Capital Inflows”.
10. Guscina, Pedras, and Presciuttini, “First-Time International Bond Issuance,” 6.
11. Greenhill, Prizzon, and Rogerson, “Age of Choice,” 34.
12. Prizzon and Mustapha, “Debt Sustainability in HIPCs”.
13. Warner, “Public Investment,” 3.
14. IMF, “Making Public Investment Efficient”.
15. ADB, Effectiveness of Partnerships.
16. Guscina, Pedras, and Presciuttini, “First-Time Bond Issuance”.
17. Corsetti, Pesenti, and Roubini, “Asian Currency”.
18. Wijeweera and Webb, “A Peace Dividend”.
19. See Group of Twenty (G20) Development Working Group submission on ‘Supporting Infrastructure Development in Low-Income Countries’, submitted to the G20 by the Multilateral Development Bank Working Group on Infrastructure.
20. In 2006, a threshold limit of 5% of Treasury bonds outstanding to foreign investors was introduced. The limit was opened up further to 10% in 2007. In 2008, the Treasury bill market was also opened to foreign investors with a threshold limit of 10%. Foreign investor limit on outstanding Treasury bills and bonds stock was increased further to 12.5% from 2011.
21. Preferential tariff concessions under the EU Generalised System of Preferences (GSP) plus granted to Sri Lanka in 2005 were withdrawn in 2009 owing to concerns on human rights issues in Sri Lanka. Similarly, a US Congressional Committee voted in 2011 to ban aid to Sri Lanka.
22. ERD, Global Partnership, 79.
23. Ibid., 79.
24. NPD, Mahinda Chinthana.
25. IPS, State of the Economy.
26. Pursell and Ahsan, “Sri Lanka’s Trade Policies”; and Kaminski and Ng, “Increase in Protectionism”.
27. IPS, State of the Economy.
28. There were diffused benefits such as a sharp reduction in Sri Lanka’s headcount poverty ratio from 15.2% in 2006/07 to 6.7% in 2012/13 (DCS, “Poverty Indicators”).
29. Cox, “New Sri Lankan Government”.
30. Kelegama, “China-Sri Lanka Economic,” 141.
31. IMF, “Staff Report for the 2016,” 25.
32. Current spending on civilian goods and services are to fall from 1.1 to 0.6% of GDP and subsidies and transfers to fall from 3.8 to 3.4% of GDP (IMF, “Staff Report for the 2016”).
33. As the first major condition of the EFF, Sri Lanka’s VAT rate was raised from 11 to 15% in 2016.
34. Sri Lanka’s GDP growth recorded 4.4% in 2016, albeit partly in response to inclement weather conditions.
35. Foreign investor holdings of total outstanding Treasury bills and bonds dropped from US$ 3.5 billion at end 2014 to US$ 1.8 billion by end 2016.
36. Export earnings contracted by 2.2%, while net FDI flows stagnated at 1% of GDP in 2016.
37. IMF, “Sri Lanka,” 6.
38. The MAC framework assumes countries do not rely on concessional sources of financing and have significant access to other sources such as international capital markets.
39. IMF, “Staff Report for the 2016,” 69.
40. Jones, The New Debt Trap, 13.
41. Weerakoon, “Sri Lanka’s Economic Reform Process”.