sl external debt sustainability intervention by practical economist keeps the debate live

8/12/2019 SL External Debt Sustainability Intervention by Practical Economist Keeps the Debate Live

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SL external debt sustainability:

Intervention by Practical Economist

keeps the debate live

July 21, 2014

Practical Economists re-entry to the fray

In a welcome move, an economic analyst writing under the enname

!Practical Economist has resonded "availa#le at$

htt$%%www&ft&l'%2014%0(%1)%a-view-of-sri-lan'as-e*ternal-de#t-situation-

with-neutral-glasses%+ to this writers revious articles on ri an'as

e*ternal de#t sustaina#ility highlighting the misleading conclusions of a

ress release issued #y .entral /an's Pu#lic e#t eartment or P due

to data incomleteness&

hese articles could #e

accessed #y visiting

the following lin's$

rst$

htt$%%www&ft&l'%2014%03%2)%sri-lan'as-e*ternal-de#t-sustaina#ility-

comlacency-#ased-on-incomlete-analysis-may-#e-the-worst-enemy%

second$ htt$%%www&ft&l'%2014%0)%25%central-#an'-claries-on-de#t-

sustaina#ility-#ut-it-#egs-more-6uestions-than-the-ones-answered% third$

htt$%%www&ft&l'%2014%0(%0(%central-#an'-does-it-again-shoot-the-
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messenger-while-ignoring-the-message%&

he intervention of Practical Economist who has admitted that he was the

very same Practical Economist who had an interesting e*change with this

writer earlier on ri an'as outut ga is welcome for three reasons&

Even stuid arguments should #e welcome since they create a live de#ate

7irst, Practical Economist has #rought the de#ate #ac' to life reventing it

from having a natural death for lac' of reader interest& ri an'as u#lic at

large has of late #ecome aathetic to many issues concerning them& heir

silence has #een dangerous to the wor'ing of the democratic system& o

ma'e democracy wor', eole should sea' out oenly, agreeing or

disagreeing, on vital issues&

his writer recalls a iece of advice given #y Professor 8ichael Jones-ee of

9:s 9niversity of ;or' in 1;ou may have the most stuid oint, #ut dont

hesitate to resent it #ecause itll hel us to resolve it together and #ecome

wiser&? hus, in a democracy, even the most stuid argument to of a

dissenting citi@en should #e referred to the silence of a oulation&

.riticism hels self-correction

econd, Practical Economist has heled this writer revisit his

articles and comare notes in the light of the counteroints

raised #y him& he urose of intellectual de#ates in civilised

societies is not to win them #y crushing the oonents #ut to

gain wisdom& his can #e done only when criticisms are

entertained& It will ena#le all those concerned to correct

themselves if they had #een erroneous&

A neutral Budge should loo' at #oth luses and minuses

hird, Practical Economist has claimed that his is an e*ercise

to loo' at the de#ate !with neutral glasses& hat is also

welcome #ecause in any de#ate there should #e a neutral

ar#iter to adBudicate the issues that are #eing resented #yde#aters& =owever, such a neutral Budge should ossess certain 6ualities

which have #een stiulated #y the /uddha in /rahmaBala utta in igha

Ci'aya in his advice to /hi''us angered #y those tal'ing ill of him&

he /uddha has said$ >ont get angry when others tal' ill of me e*amine

carefully their arguments and tell them that in this sense they are correct

and in this sense they are incorrect&? Accordingly, an ar#iter wearing
http://www.ft.lk/wp-content/uploads/2014/07/1128.jpg


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neutral glasses has to weigh evidence involving #oth luses and minuses

resented #y the de#ating arties and come u with a #alanced stand

refraining from defending one side and nding fault with the other& A

neutral ar#iter does not do Bustice to the e*alted role he has assumed

unless he ossesses these 6ualities&

Is Practical Economist neutralD

Practical Economist has, however, not e*amined the arguments and

counterarguments in the de#ate the way a neutral ar#iter should have

done& =e, li'e P, has not answered the vital 6uestions raised #y this

writer in the articles mentioned a#ove& Instead, he has resented his own

reasons as to why this writer has #een incorrect, raising 6uestions unrelated

to the issues at hand such as a resumed olitical #ias of this writer and

there#y colouring his neutral glasses&

Ceed for forward-loo'ing indicators

Practical Economist has argued that international organisations li'e 9C

E.AP or I87 resent only #road guidelines and therefore they do not t

erfectly into a countrys secic situation& 9C E.AP indicators, he says,

are not forward-loo'ing #ut #ased on historical facts& hus, he un'nowingly

condemns Ps aroach&

In contrast, e#t ustaina#ility Analyses conducted #y I87 and orld /an'

are more forward-loo'ing since they ta'e into account diFerent scenarios of

shoc's involving changes in e*change rate, interest rates and outut levels&

hat was e*actly the oint which this writer too has made&

Practical Economist has Bustied ri an'as high de#t%GP ratio #y 6uoting

countries from the develoed world which have even higher de#t to GP

ratios& he countries 6uoted include 9A "


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P, having relied on historical analyses which are now discarded #y

Practical Economist, had used a wrong set of data to inform the u#lic that

ri an'a has >continued to imrove its e*ternal de#t sustaina#ility

indicators? as er the 9CE.AP indicators rescri#ed in the 8anual on

EFective e#t 8anagement&

wo issues were raised #y this writer$ 7irst, P cannot claim that the

countrys e*ternal de#t sustaina#ility has imroved Bust #y ta'ing into

account only the central governments e*ternal de#t second, even the

num#ers relating to the central governments e*ternal de#t and arameters

used for calculating indicators have not #een in accordance with the

recommendations of 9CE.AP 8anual&

Lne area of contention was the use of remittances as a arameter for

calculating the de#t sustaina#ility of the country& Practical Economist says

that it is 6uite right for ri an'a to include remittances as a steady Mow of

foreign e*change since they are availa#le to service its de#t, an aarent

Bustication of what P had done stealthily violating the /an's

governance code& /ut when a country has a massive trade decit

e*ceeding this steady Mow, remittances are rst used to #uy imorts

there#y wea'ening the cushion it may rovide to service e*ternal de#t&

ince ri an'a cannot crunch imorts, e*ternal de#t has always #een

reaid #y reissuing the same or #y #orrowing new funds& hus, .entral

/an's Economic Kesearch eartment consisting of theoretical economists

has very correctly chosen not to view remittances in this sense&

Kesults of the de#t vulnera#ility yardstic' not encouraging

his writer too, li'e Practical Economist, argued that the country should go

for a forward-loo'ing de#t vulnera#ility yardstic' rather than historical

indicators&

his is what this writer said in his rst article on the su#Bect$ >here are

many other indicators suggested #y #oth the 9C E.AP 8anual and I87s

E*ternal e#t tatistics to assess a countrys e*ternal de#t sustaina#ility&Lne such indicator used #y E.AP in its Economic and ocial urvey for

2015 is the E*ternal e#t Nulnera#ility ;ardstic' " 52+& In this ;ardstic', the

sum of short term e*ternal de#t, 6uarterly imorts #ased on four 6uarter

moving average and estimated international ortfolio investment is

e*ressed as a ercentage of the e*ternal reserves of a country& It thus

measures the num#er of times a countrys short term o#ligations are #igger


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than its availa#le foreign reserves& /y using the num#ers reorted in the

.entral /an' Annual Keort for 2015, this yardstic' was calculated in

resect of 2012 and 2015& It amounted to 1his is not to suggest that commercial and non-concessionary #orrowings

are undesira#le for ri an'a& he countrys savings O artly due to low

rivate savings and artly due to governments e*cess consumtion over

revenue, a situation called governments dissavings O are around 1H to

20& /ut its investment re6uirements are #etween 50 to 53& =ence, the

conse6uential massive savings-investment ga has to #e nanced #y using

the savings of foreigners, mo#ilised through #orrowing and direct

investments& /orrowings add to countrys de#t, while direct investments

dont& =owever, direct investments have #een at a very low level O less

than 1 #illion on average O generating a little over 1 of GP& he country

does not get worthwhile foreign direct investments due to its oor trac'

record in several 'ey areas$ rotection of roerty rights, rule of law, law

and order and ease of doing #usiness& =ence, the only source availa#le for

maintaining a high investment ratio is to generate funds from foreigners

through #orrowing and there-again, #orrowing from commercial mar'ets&

=owever, since the foreign commercial #orrowings increase the countrys

ris' and reduce its de#t sustaina#ility, they should #e used only in roBects

that are voted as high riority after carefully conducted cost-#enetanalyses& /ut if they are used in low yielding roBects that have #een

chosen haha@ardly, then, such foreign commercial #orrowings increase

only the countrys ris's&?

It aears that the learned Practical Economist has missed this oint&

anger of condemning critics without 'nowing facts

Practical Economist has also made sweeing statements not relevant to the


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counterart agreements where#y ri an'a aid for such wheat imorts #y

maintaining a ruee deosit account in the .entral /an'& hus, there was

no immediate ayment of foreign e*change #y the country&

he allegation made #y Practical Economist is a oint initially made #y a

to olicy-ma'er at various u#lic forums aarently in an attemt at

demonising ast administrations& It aears that Practical Economist has

coied it without giving due credit to that olicy-ma'er or reference to the

resent situation& he resent situation is that the Government runs a

decit in its revenue account where the Governments consumtion

e*ceeds its revenue& herefore some of the #orrowings even today are used

for consumtion& ithout drawing on the wisdom of theoretical economists

one cannot say which is worse$ eating American #read or sending on

wasteful Government consumtion&

ri an'a cannot rint dollars to reay de#t

Practical Economist has Bustied ri an'as high de#t%GP ratio #y 6uoting

countries from the develoed world which have even higher de#t to GP

ratios& he countries 6uoted include 9A "


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lines to really understand what they communicate&

econd, their reorts use technical language #ased on rigorous economic

concets to communicate their views and unless one is conversant with

those theoretical concets, he is una#le to gauge their true meanings& his

is li'e a la#oratory reort on a atient that can #e read roerly only #y a

6ualied hysician& his shows the deciency with which one suFers if he

has no sound-footing in theoretical economics&

I87 has indeed alerted the Government

he recent reorts issued #y I87 do not suort the claim made #y Practical

Economist& In its Article IN .onsultation Keort in 8ay 2015 "availa#le at$

htt$%%www&imf&org%e*ternal%u#s%cat%longres&as*Ds'T4035coverage still

aears somewhat low when Budged several commonly used metrics? "

14+& hese metrics have #een reorted in a small diagram on the same

age& Accordingly, in terms of ri an'as short term de#t amortisation

needs and going #y the virtual *ed e*change regime #eing currently

ractised, foreign reserves are totally inade6uate romting I87 to advise

that e*ternal osition needs further >strengthening?, the dilomatic

language which it uses to alert its owners&

As for e*ternal de#t sustaina#ility, ri an'as stress testing, a forward-

loo'ing measure of ris' assessment, does not reort a healthy icture if the

e*change rate dereciates or interest rates increase or growth rates falter

"Aendi* on e#t ustaina#ility Analysis in the Keort+& heoretical

economists 'now that these are real ossi#ilities that do not ermit olicy-

ma'ers to #e comlacent&

.aution a#out commercial #orrowings #y I87

A#out commercial #orrowings, the then I87s Kesident Keresentative,:oshy 8athai, in a ress #rieng on 5 ecem#er 2015 "availa#le at$

htt$%%www&imf&org%e*ternal%n%tr%2015%tr120515&htm+ has conrmed this

writers stand& =e said that commercial #orrowings >have to #e done in a

rudent way, the rates have to #e loo'ed at carefully, andUas we "I87+

emhasise in the reortUthe returns that are gotten on the investments

nanced #y those #orrowings have to #e suVcient to cover the #orrowing


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costs& hat simle idea always has to #e 'et in mind?&

hese are very olite statements and their real meaning #etween lines has

to #e read correctly #efore claiming that I87 has not ut ri an'a on alert&

A#out rating agencies, ri an'a has #een continuously rated #elow !Bun'

#onds, alerting investors that there is a high ro#a#ility of loan default&

7allout from Practical Economist

he revious P ress releases were indictments against the 8onetary

/oard and senior oVcers of the .entral /an', resectively& he intervention

of Practical Economist who has ta'en ride in #eing ractical and not

theoretical is aarently an indictment against .entral /an' economists

who are technically-sound rofessionals with mastery of theoretical

economics&

"&A& iBewardena, a former euty Governor of the .entral /an' of ri

an'a, can #e reached at waw1

sl external debt sustainability intervention by practical economist keeps the debate live

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