Public debt has a long history in this country, and there are ill-conceived attempts to hide the true facts of public debt. The outcome of recessions, bank runs and financial crisis has caused various interested parties to question the benefits of debt and the impact of excessive indebtedness and default, leading to the question of an optimal amount of indebtedness
Public debt is a hot topic in Sri Lanka. Borrowing by the government of this country in the past was aimed at covering the budget deficit due to a shortfall in tax revenue or meeting planned expenditures. In the recent past, many loans have been granted for the development of necessary and not immediately necessary infrastructures, considered as long-term investments such as ports and airports supposed to accelerate economic growth.
The government is forced to borrow to fill the deficit in the government budget, such as an oversized public service, non-performing public enterprises, pension payments, as well as selling imported consumables such as fuel below the imported cost to maintain a welfare state.
Most public services are charged below cost due to political pressure to help the public meet social demands or reluctance to raise taxes for fear of political consequences. The loss incurred by the subsidized companies was more than Rs. 100 billion last year. All citizens subscribe to it. We are now in a trap of local and international debt by short-term investments and management by the government.
The government can borrow at low interest rates from many global financing institutions on the basis of project proposals as long-term investments at low interest rates with grace periods.
Investors view government bonds as a safe haven and therefore they can be an attractive source of income in lieu of taxation. Overall, public debt can have significant impacts on the economy and society. Governments, like all financial institutions, must manage their debt to facilitate growth.
Hence, it is very evident that Public Debt and Public Debt Management is an important research area as it brings together several stakeholders such as economists, statisticians, analysts, investors, accountants, politicians and many others.
Indeed, history has shown that excessive indebtedness can have catastrophic consequences such as economic recessions, over-indebtedness, banking system collapses, exchange rate crises and inflationary explosions such as the recent debt facing Sri Lanka.
Public debt has a long history in this country, and there are ill-conceived attempts to hide the true facts of public debt. The outcome of recessions, bank runs and the financial crisis has caused various interested parties to question the benefits of debt and the impact of excessive leverage and default, leading to the question of an optimal amount of indebtedness.
For example, one of the critical discussions seen in the economics and finance literature is the relationship between debt and economic growth and the possibility of optimal debt to GDP. In addition, the economic literature examines the ideal public policy responses to crises and sustainability. Similarly, accounting research focuses on public sector measurement and reporting issues to improve accountability and support decision-making.
The primary responsibility of regulatory bodies such as the World Bank (WB), IMF, Japan Bank for International Cooperation (JBIC) and International Finance Corporation (IFC) is to maintain financial system stability and healthy sovereign borrowers. are the foundation of this system. . Over the past decade, public debt has reached new heights.
One of the worrying concerns of regulators monitoring Sri Lanka is the rise in debt due to “hidden debts”, as the landscape of creditors and instruments changes. These hidden debts may be linked to a combination of off-balance sheet borrowing, poor recording and reporting of public debt, money printing and poor governance, as well as non-economists involved. in governance and debt control due to political blunders.
In this context, improving the reporting and comparability of debt measures is essential, so that it can ease lending conditions by reducing “debt surprises” and, overall, support proper assessment of public finance sustainability by lenders. Debt reporting plays an important role in governance.
In this country, most of the state accounts are not up to date and the audits are not carried out or are more than 12 months late in the state bodies and they are not published to the knowledge of the public. . Transparency of accounting formats is not universal.
Debt in this country is referred to as foreign borrowing. Debt data may include debt securities and loans. In this country, the valuation method is not explicitly stated, although different valuation methods can create significant differences. Consolidation, which involves the removal of intra-government bonds, may impact debt figures.
If debt is reported on a cash basis, it will exclude large arrears or non-cash obligations. Therefore, the definition of debt and how debt is reported is important. This thesis offers an overview of the challenges of debt measurement by examining the two main reporting systems. Statistics vs accounting.
This will be further analyzed by assessing what types of liabilities are and should be included, which public sector entities belong to and how they are valued. Given these dimensions and challenges, public debt can be defined in several ways. It is therefore essential to clarify definitions and purpose when using debt indicators.
Also, should the government provide a standardized aggregate debt indicator? This could promote greater transparency and comparability with international figures. Is this country’s public debt based on a universal measure of debt? Be that as it may, this vision of having a single standardized indicator of global debt is a must.
The crisis facing Sri Lanka today needs to be looked at from a statistical and financial point of view. The options available will be to restructure all foreign commercial borrowings. The government can borrow at low interest rates from many global financing institutions on the basis of project proposals as long-term investments at low interest rates with grace periods with the help of the IMF, AfDB, JBIC, IFC, WB and others.
The exit from public debt for welfare must be met by raising taxes or removing subsidies. The government moves the low-income public into a “low-income trap” by providing Samurdhi, alms, etc. This year, about 500,000 families have been moved to the low income group.
The government’s objective should be to shift groups with no income to low income groups and low income groups to middle income groups by supporting and incentivizing the private sector to increase employment opportunities, agricultural performance and farming.
India and China are good examples of shifting from no-income groups to low-income groups to middle-income groups. Bangladesh has managed to bring down its poverty rate to 11% in 2021 and is expected to drop below 10% in 2022 despite COVID, as stated by the World Bank. Our politicians work the other way by increasing welfare recipients; “Koheda Yanne Malle Pol”.
A major role can be played by increasing private public transport and improving unsubsidized rail service which is only used by 7% of travellers. The efficiency of public services should be measured by output per employee versus cost of employment as an efficiency target. Private versus public organizations.
A good example is Indian Oil Corporation, a state-owned company of India in Sri Lanka. They are making a profit while Ceylon Petroleum Corporation is operating at a loss? The cost of employment is also very high at CPC and there is political indifference in management.
Yet, imports are greater than exports despite the ban on imports. The debt to GDP ratio is 111%. The value of the rupee fell by around 32%. Banks are under Rating Watch Negatives. Bilateral debt has increased due to political blunders.
Another shortcut method is to manage two sets of books. Remove all outstanding debts of government and state organizations between state organizations such as Debt to Petroleum Corporation by CEB/Railway/SLTB/SriLankan from the books from March 31 and operate on a cash basis.
Thus eliminating the responsibility of the State for the payment of contributions; “Stealing Peter to pay Paul”. This will result in a loss-making state organization responsible for payments. Ministries and heads of departments will need to think like unfunded private sector organizations to work on a cost/result basis.
We must bail out the current crisis by having immediate, short-term and long-term plans. It may be unpopular but “the country and the people must survive for the next generation”. Even with a change of government, the central bank governor and finance ministry secretary are unlikely to be moved until the country emerges from the crisis assuming their plans work within the next four to six months.
Ministry professionals must be empowered. The politicians are interested in winning the next elections at the expense of the people. The country must survive and the people must live beyond politics.
The smartest decision to bail out corrupt and indebted countries is taken by India, namely Aid for Trade. Otherwise, 30% of the bailout will be pocketed by corrupt politicians like what has happened to this country over the past three decades.