Our depressing debt diagnosis

Originally appeared on The Morning

By Dhananath Fernando

Sri Lanka must understand how it got here before getting out of here

Last week, the Central Bank announced all export proceeds should be brought into the country within 180 days of shipment. Additionally, they stated that all exporters should convert 25% of their foreign currency earnings to LKR from the invoice value upon entry into the country. This was brought in just a few weeks after they restricted forward purchasing for importers. With these two moves, Sri Lanka’s debt sustainability has come under the spotlight once again. Recent reports from Standard Chartered Bank and Barclays Bank have also contributed to the discussion.

It is clear that the Government and the Central Bank are looking at the problem differently to how investors, financial markets, and other stakeholders perceive the problem. Indeed both sides share their opinion with good intentions of overcoming the current turbulent time. 

As per recent media reports and a press release by the Central Bank, their objective is to build non-borrowed foreign reserves in order to meet our debt commitments. The Government is looking at the problem as a cash inflow-outflow problem. Accordingly, the Government expects about $ 32-35 billion inflows, about $ 15 billion from exports, about another $ 7 billion from remittances, and about $ 1.5 billion from tourism, with foreign direct investments (FDIs) and other transfers, etc. filling the balance.

On the outflow side, the Government expects about $ 19 billion for imports and sovereign bond payments are about $ 2 billion every year, so the debt can easily be served without any problem according to the reports. It further states that total sovereign bonds are about $ 15 billion which is about 17% of total debt, and none of the other creditors have made any concern over our debt sustainability. Recently, the Governor made remarks that the Central Bank buys about $ 10 million per day to build up reserves so we can cover all debt commitments. According to his view, the outlook on exports, FDIs, tourism, and remittances looks positive with the vaccination drive. 

On the other hand, investors and other agencies are of the view that reprofiling debt with International Monetary Fund (IMF) support is the best solution at hand as our foreign reserves are eroding faster than expected. They see the problem as a solvency problem rather than a cash flow problem; that we need to buy time to bounce back with a lesser impact on the entire economy. It’s not that all reserves are liquid as some reserves are in gold and some IMF commitments and swap commitments are already included in the available reserves of about $ 5 billion. The question from the investors is: “If the cash flow is smooth, why does it continue to erode the reserves which are now at a historic low?” In this context we have to evaluate what we should do and what is possible to do.

Let’s get into the basics. In the debt discussion, we have all been debating on how we can settle the debt and how we can keep our noses above the water. But we should not forget the reasons that brought us to where we are today. We borrowed beyond our capacity at high interest rates and invested in projects which generate returns far less than our payment capacity. In other words, we borrowed at market rate and invested in non-tradable goods which did not generate any tradable return necessary to repay a part of the debt. Since we have failed to avoid the causes of the problem, now we have to pick the best possible escape route from the problem.

Secondly, in my view, we have to estimate the extent to which we can build up reserves by buying USD from the market given the current policy stance. The Government has committed to a policy to keep the interest rates unchanged and keep the exchange rate to USD in the Rs. 185 range. We need to understand that the USD inflow estimate of about $ 15 billion is not owned by the Government but by the exporters, and so are our remittances. The same applies for the imports where importers have to have money from the market to import the basics such as fuel, pharmaceuticals, etc. In this context, to build up the reserves, the Government has to buy USD from the market and that is how the Government can capture the USD available in the market from exporters. To do that, the incentive structures have to be there for exporters to sell more USD rather than save USD. Currently, the interest rates for USD are higher than interest rates for LKR accounts, so expecting a currency depreciation, the market perception is more skewed towards keeping their money in USD form. To overcome that incentive discrepancy, when the Government imposes a regulation to procure the USD earnings by exporters within 180 days and to convert 25% upon shipment, it is likely that the exporters under invoice consider options to park their money in offshore accounts, which will further erode our inflows. 

At the same time the regulation will impact some exporters who run on thin margins who have a portion of imports in their exports. On the other hand, the companies who have USD commitments and agreements with other companies now have to face extra pressure and loss on conversions due to this regulation. 

In my view, the sovereign debt problem has a broader dimension beyond just calculating cash flow. Because the Government owns the debt and because the USD cash flow is owned by private businesses and individuals, the Government requires a mechanism to capture it either by taxation or mopping up the liquidy from the market by tightening the systems by allowing the interest rates to move upwards. That will slow down the economy. The Government’s current strategy of buying their own Treasury bills and bonds, in other words printing money, will add constant and excessive pressure on imports through channels where the imports are open, though we have a import control policy. At the same time, it is highly likely that the excess liquidity will convert to credit with the economic recovery from Covid-19 and add pressure on inflation and cost of living. We have to keep in mind that while we build reserves by buying USD from the market, we might have to sell some of it again to keep the exchange rate stable. Changes in the exchange rate will affect our debt-to-GDP ratio.

It is true the sovereign nations have the legitimate power to print money, but ultimately what consecutive governments consumed by taking debt has to be paid in real terms by earning it real value, and there is no shortcut for it. Very importantly, while the debate is on as to what route we need to take, we should not forget the reason that brought us here.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Why is the President being ‘landed’ with this request?

Originally appeared on The Morning

By Dhananath Fernando

A digital land registry could help our rural masses 

The “Gama Samaga Pilisadarak” is the President’s most recent engagement programme. Positives and negatives of the programme have both been openly discussed on mainstream and social media. As per media reports, the programme is structured in such a way that officials of key ministries, such as Land, Education, and Road Development, visit villages with the President. 

People are then requested to put forward their problems before this entourage of officials. They try to solve the problems at the location itself, directing the state officials to act faster. The President mentioned that following such a course of action has helped build local infrastructure and helps him understand people’s problems better. 

On the contrary, on social media, views have been expressed on forest destruction concerning areas where the President has been visiting, and describing this as an attempt to prioritise development at the expense of our green cover. 

The objective of today’s column is not to provide a commentary on “Gama Samaga Pilisadarak”, but an effort to put things into perspective regarding the most common concerns people have been putting before Sri Lanka’s First Citizen. Secondly, we aim to explore why the very same issues are being repeated in most of the villages. In my understanding, the problems presented to the President are just symptoms of a bigger problem, and it looks like the solutions instantly provided by the officials are just temporary solutions without understanding the problem at its root. 

Most frequent requests made to the President, as have been telecast in the news, are requests for land to conduct agricultural activities. The fundamental question is why solving issues surrounding land has become a common-priority request, as we saw on television, with people screaming and pleading the President to get their land matters solved.

As indicated multiple times in this column, about 80% of Sri Lanka’s land is owned by the Government. Out of that, about 30% is our forest cover. As a tiny island, land is obviously a limited resource in economic terms. Therefore, if we fail to optimise the utilisation of land, all the natural beauty and biodiversity we brag about is most likely to fade away from us. 

Creating land, like what we did with the Port City, is extremely expensive and environmentally costly. The problem lies in the fact that most of the land our farmers cutivate is only under a licence, and they do not have a title. As a result, the farmer has to visit the Divisional Secretariat to obtain a license, renew the license, or even to obtain approval to change the crop they cultivate. 

Smaller and smaller portions

Most of these lands our farmers cultivate are provided under different land and agricultural projects. Over generations when the original land is divided among family members, the land plot becomes smaller and smaller.

For example, look at what happens when the original land of five acres is provided to a farmer, which in turn is divided among his four children. This will get subdivided after the next generation. Now, instead of five acres, only about 25 perches of land will now be available, and this has limited scope for agriculture. As a result of these smaller land plots over generations, industrialisation or commercialisation of cultivating lands is unfeasible.

Employing technology and machinery to increase productivity on a 25-perch land plot is not feasible. As a result, people ask for more lands from the Government, or encroach on forest cover to do their farming.

On the other hand, these lands do not have titles. So farmers are unable to optimise the maximum usage of the land using technology, because they have no source for capital. They don’t have other assets to use as collateral to access finance, nor are the banks willing to provide them loans without any valid collateral.

As a result, the land problem has become a vicious cycle. These circumstances have led to a scenario where a combination of factors continue to make our farmers poorer and our agriculture unproductive, while trapping our farmers in informal loans and creating severe social concerns such as suicide. There is the additional issue of contributing to the loss of our forest cover and destroying our biodiversity. 

If we look at countries that are in deep poverty, one of the common denominators is that the people of those countries do not have their land and property rights. There is no magical formula for an economy to take off without establishing property rights for their citizens. 

The President expressed his displeasure at rumours circulating on social media on the destruction of forest cover, but until we provide a permanent solution to this problem, we will lose out on every front. The President will have to hear the same complaint at every location he visits.

On top of that, the Government has decided to stop all agricultural imports for the next four years, as per reports by The Morning. This will most likely worsen the situation. Food prices will go up, and more farmers will attempt to do agriculture by practicing their unproductive farming methods. 

The rising prices will punish all our poor consumers already suffering from the high cost of living. At the same time, our tourism will suffer, as it needs some imported agricultural products to prepare the cuisine. However, it is understandable that balancing such a dilemma when foreign reserves are depleting is going to be a serious challenge.  

What is the solution?

The President has a greater opportunity to capitalise on this matter economically as well as politically. We have to have a digital system and a digital land registry. As soon as the “digital land registry” is spelled out, many associate it to the three-letter “MCC” agreement. That is now gone, and there is very little value in debating it now. 

But over the next four years, the President can prioritise the digital land registry, which will mark forest cover on the cadastral survey system with GPS coordinates. It will increase Government efficiency drastically, release the dead capital of land among farmers, and investments will start kicking off. Most of the back-end work has been done, and cases for the need for a digital land registry have been developed. 

The question is: how are we going to find money to implement the survey and purchase the technology? We have to seek out multilateral donor agencies, or a potential bilateral loan, to secure the funding, as this will create massive economic potential. Setting up a digital land registry will be significantly impactful, rather than just developing a road or incurring another massive capital expenditure. 

This is an action which will move us upwards in the Ease of Doing Business Index, and build investor confidence. At the same time this will fall perfectly in line with the President’s manifesto of “Vistas of Prosperity and Splendor” under a digitised economy. 

The ripple effect will trickle down to smaller cases at courthouses, as well as to micro and small business enterprises when the project unfolds. 

Since there have already been many land deed programmes such as “Jayabhoomi” and “Swarnabhoomi”, this will not be a simple and easy project. Having the simple digital infrastructure ready is the first step to address these issues, both at present and in the long term. 

The main opposition comes from lawyers, as they are the main beneficiaries of delayed court proceedings. If the President focuses on this single reform, it will not only be the best-ever environmental conservation reform to protect our green cover, but also a historic economic reform to unlock our dead capital, and reactivate capital markets and agriculture. Most importantly, it will be a big relief for our farmers and fellow Sri Lankans.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Colombo's traffic: can solving the problem of schools help?

Originally appeared on Echelon

By Ravi Ratnasabapathy

Children hit the books; adults hit the brakes. Back to school for them, back to the gridlock for everyone.

Travelling in Colombo is now a test of patience, traffic having reached an impossible level.

For motorists, disorderly flows of vehicles, people and animals make the roads a nightmare to navigate. Toxic fumes poison pedestrians and residents alike, leaving an unsightly haze visible from the city’s high-rise buildings. Travel forums for tourists include discussions on ‘rush hour in Colombo’ and ‘the best time to miss traffic’.

Even if one gets through the traffic, parking is almost as big a hassle. School vans permanently occupy some streets, while rows of trishaws hog other parking spaces. Traffic congestion imposes a variety of costs, some obvious, some hidden, on businesses and individuals. At the most basic level, increasing congestion means longer travel times for passengers and higher operating costs for vehicle operators.

University of Moratuwa civil engineering and transport expert Professor Amal S. Kumarage estimates that Sri Lanka incurs an economic loss of around Rs. 40 billion annually due to road traffic congestion and air pollution.

Solving the larger traffic problem requires a proper public transport system, but one of the most peculiar aspects of Colombo’s problem is school traffic. The world over, school traffic creates some problems, but for policymakers elsewhere school-related traffic congestion is confined to the overcrowding and blocking of streets on or near school property. The problem with Colombo is that school traffic extends from one end of the city to the other. During peak school hours, some areas of the city are impassable. The reasons peculiar to Colombo include a clustering of popular schools in central Colombo and adjacent areas, growth in student numbers over the years, and an increasing tendency for students to commute daily from outside the city to schools within the city.

Growth in school rolls within the city has far outgrown the capacity it was designed for, and excessive centralisation of economic activity around the Western province in general and the city in particular, which draws in large numbers of commuters. In 2001, the floating population was estimated to be 400,000; today, it is thought to be 1.5 million.

“Traffic congestion imposes a variety of costs, on businesses and individuals”

A century ago, colonial rulers encountered a similar problem with congestion in the city. The Housing and Town Improvement Ordinance No. 19 of 1915 was introduced to check “the uncontrolled and irregular building spread” in the city. “These regulations attempted to control the size, orientation, spacing, height and spatial arrangement of buildings to permit sufficient direct sunlight to the buildings and maximise ventilation. The chief features of the bill were its preventive and remedial measures. These were four-fold:

1. No building was to be erected unless roads existed to serve them.

2. No building was to exceed in height the width of the street on which it was situated.

3. Rooms were to be provided with sufficient space, ventilation and light.

4. Open spaces were to be provided in the rear of the buildings as a common channel of ventilation behind continuous rows of houses.

Following this, the Geddes plan of 1921 set the boundaries of the city and designed it to make it “The Garden City of the East”. The tree-lined streets (Bauddhaloka Mawatha) and the grid system of roads in Cinnamon Gardens are legacies of that plan. The Abercrombie Plan of 1948 noted the high concentration of economic, trade and port-related activities in the city and emphasised the decentralisation of the city’s activities to the suburban areas of Ragama, Homagama and Ratmalana as satellite towns. The plan included a ring road to link these towns and the shifting of central administrative functions to Ratmalana. This plan was not implemented and neither was anything else. Despite subsequent plans in 1978, 1985 and later, nothing was enforced. The city grew organically, in an increasingly unruly manner that paid no heed to infrastructure, land or even safety constraints. The most recent spate of building apartment complexes and hotels threatens to overwhelm the water, sanitation and waste disposal infrastructure, what some now term a ‘cancerous’ development. Development, but of a malignant kind, that can eventually choke and poison the city.

Can schools be one place to start fixing things?

It is absurd that people should have to send their children halfway across the country to attend school. To the author’s knowledge, school vans routinely travel from as far as Embiliptiya and Hikkaduwa. This is a colossal waste of fuel and bad for children who are giving up family time or extracurricular activities in exchange for commute time. Parents are lured into these insane commutes by another insane system: the perception that job, marriage and all future prospects are tied to the school one attends, regardless of the actual quality of education. Previously, parents aspired to send children to central colleges within their district that provided excellent facilities, education and the opportunity to enter university.

One of the aims of expanding the system of central colleges in 1943 (when 11 were established) was to check the shift of the rural population to urban areas. The colleges, modelled after Royal College with properly equipped with science labs, libraries, playgrounds, etc, catered to students within a six-mile radius. The number was expanded to 23, and by 1944, there were a total of 54, on the basis of one per electorate.

The schools had good teachers and the principals were selected on merit (by the Public Service Commission), making them immune to political pressure and enabling them to discharge their duties without fear or favour.

“The selection of teaching and other staff was done according to a pre-designed specific cadre. The all-round educational needs of the children were reckoned as the all-important factor, and more than not, the principal was consulted in the matter of appointments. Sometimes he was invited to serve on the selection board. There was also the assumption that teachers selected to central colleges had to be necessarily proficient in some extracurricular activity and be willing to assist in the afternoons at no extra remuneration” – CTM Fernando

The purpose of the Grade 5 scholarship exam was not to send even more children to schools in Colombo, but to gain admission to the closest central college. In its heyday, the quality of the products of the central colleges was not questioned, and that “all central colleges without exception served the purpose for which they were established is borne out by the fact that a vast majority of our professionals and other governmental and non-governmental executives are the products of these central colleges” (Fernando).

The decline of colleges was due to short-sighted politics. People were clamouring for more central colleges and the MPs responded by simply renaming small schools as “central colleges,” lacking the facilities and teaching staff. The politicisation of teacher selection meant appointments of central college principals were taken over by the ministry. “This new breed of politically appointed principals were often accommodated to ‘look after the duties of the principal’, as they lacked the requisite qualification and the experience, not to mention personality, to be one. When some of them lacked any competence in English, it was argued that English was not needed in the “Swabhasha system”.

Their knowledge of education and educational administration was woefully pathetic; but none dared to comment” (Fernando).

“The recent spate of building complexities can be termed a ‘cancerous’ development”

Can this system be recreated? Central colleges lack ‘cachet’, so we can never return to that and, depending on the politicians who destroyed an existing system, to recreate one is far too optimistic; but could affordable private schools, teaching in English, restore the system of education in the provinces?

If the government has no money to spend building schools, the logical step would be to allow the popular Colombo schools to build branches outstation. Several smaller ‘international’ schools such as Lyceum already have branches outstation. Initial funding could come from investors, either local or foreign, but on the basis that fees would be charged, which is the case at international schools. That parents pay heavily in ‘donations’ to get into popular schools is well known. Paying for extra tuition is widespread. Add to this the cost of paying for long distance school transport. If the right model can be found, paying proper fees for a decent education, close to home, would be an attractive option for parents and ease some of the chronic congestion in the city.

The government would need to implement proper planning regulations to check the growth of schools in congested areas while encouraging them to set up in key locations elsewhere. Perhaps the buildings and facilities of the old central colleges could be upgraded and rebranded to attract students from the area. Instead of the proposed purchase of Mi17 helicopters (apparently for use in UN missions), the government should spend this money on school infrastructure. Volunteer teachers from overseas and teacher training programmes could help fill in the gaps for teaching staff.

These are only suggestions, but policymakers need to start thinking outside the box; even dusting off colonial era plans would be an improvement.