Sri Lanka has officially exited its debt default stage. This is a state of affairs that we are seeking sanctuary in. We are as a nation quite self-congratulatory about our new found compliant nature. How we got here is a long story. But the fact that a nation can be proud of creeping out of debt default, in itself tells a story. It says that we are a nation that just pulled back from the brink. We are happy about the fresh lease of life we have been handed.
It shows how much we are as a nation pegged to the externals. If some ratings agencies upgrade our status, we are ecstatic and we are down in the dumps when they downgrade us. The fact that we are neck deep in debt, but have just crept out of default status, is akin to being in troubled waters with the nose just above the waterline.
Our journey is still perilous. We have much debt to pay off and much of it has to be paid substantially several years from now, starting in 2028. So, the fact that we are not defaulting is not an achievement.
We are a country that ought not to have defaulted in the first place. Financial mismanagement played a major role in this outcome, and it appears we were gung-ho about not obtaining an IMF bailout when we were in financial trouble, because we had rulers who harboured false pride.
In the rear view mirror, it appears as if we defaulted because we had no choice, but that’s not true, because we had a choice and preferred initially not to take it. Having not gone to the IMF on time, we were, however, forced to default officially, eventually.
APATHY
Our foreign currency assets are substantially less than our debt component. Why and how did we fall in debt so badly? There was poor planning, a lack of productivity, and corruption. Some countries are trillions in debt, but they have not defaulted. We defaulted due to bad planning of course, but the question of a default would not have arisen if we as a nation were productive.
So this sanctuary status of not being in default is not a sanctuary status at all. Rather, it is a reminder that a default is near at hand if we mismanage our finances once more. It is clear then that financially-speaking, we are living on edge.
Technically we should have been ahead of Singapore by now. That’s simple to understand, as we had far better foreign currency reserves in the years immediately after independence, than Singapore.
Our subsequent debt was a result of apathy and an inability to assess our circumstances properly, and react as a nation that wants to grow and prosper. We were living beyond our means, primarily because our means were rather insubstantial.
Shoring up our revenue position was not the remotest concern of any Government that was in power. Then why was Singapore different? Singaporeans had a growth vision because the leadership and the people, we daresay, had a growth vision on the radar.
To give the reader a measure of the starkness of the contrast, picture this. Singapore has no external debt. The country’s net public and private debt is zero. It means that there isn’t effectively any foreign currency owed by Singapore to any country or any external actor such as a lending agency, because there is no net foreign debt. Singapore’s foreign currency assets are far more than the amount of foreign currency debt that Singapore owes at a given time, making the country entirely free of net public debt. Contrast that to Sri Lanka which is in debt to the tune of some 56 billion U.S dollars.
Singapore by being debt free is in the league of Switzerland, Sweden, Denmark, Norway, and South Korea as debt-free nations. Imagine that from a country that started from a much weaker place than Sri Lanka post-Independence, considering that both countries were declared Independent about the same time in the 1940s.
This above contrast shows that our non-default achievement is not a sanctuary status that we should be proud of. What we ought to be targeting to be is a country sans any public debt such as Norway, and Singapore.
That, indeed, would be the real sanctuary status. Countries such as the US and Japan are in trillions of public debt, but the long term debt sustainability of these nations has been virtually guaranteed. There is in other words, no major problem at least in purely empirical terms, with such countries running such huge quantities of public debt.
Could we target to pay off our entire component of public debt of 56 billion or thereabouts? That would be considered laughable, but laughable or not, that should be our target. If Singapore can do it, there is technically no reason whatsoever that we cannot. Questions would be raised about whether this should be our priority.
It should be, because we are a country that had fallen into the practice of getting into more debt to sustain our already existing debt.
borrowing
Just imagine that while Singapore, a country that was behind us at the start of the race as it were, was out of the debt-zone altogether, we were borrowing more to pay what we borrowed.
Sri Lanka to be entirely debt-free in the way Singapore is, requires an assessment of our national resolve, not necessarily our economy or our dollar-reserves. But we are unable to get out of the debt mindset because we see debt and foreign investment as the only possible way of salvation. Both are externally dependent modes of making our economy sustainable.
Singaporean leaders don’t think this way, and they didn’t think of debt default because they didn’t incur debt. For us by contrast, getting out of debt-default seems to be a major achievement.
Our angle of attack, to resort to aviation terminology, should be a mindset of ridding ourselves of debt altogether. As a start we should as soon as possible reach a point where we can declare perhaps a moratorium on debt — external borrowings — altogether. This is not part of the recipe that anybody had stipulated for us.
But no foreign lending agency or other entity made that recommendation for Singapore either. There would have been external actors including certain foreign countries that would have dearly loved to see that country in some sort of debt. But being in debt or getting into debt was not on the policy agenda of Singapore’s leadership.
So with South Korea. Whenever there is a reference to Singapore, some so-called experts here would dismiss it by saying it is a city state and an aberration. Well, how about South Korea then, which has zero public debt as well. Public debt closed at 48 percent of the GDP in 2020, and it means that there was no net debt in that country. South Korea simply does not have any significant external debt.
Well, if anyone argues that Singapore was in a worse place than Sri Lanka, South Korea was in a much worse place well past the 40s when we were declared independent. South Korea does not have any significant natural resources, and is in this regard similar to Singapore.
But if South Korea does not have any significant external debt or public debt, what is the country’s secret? It is the same as Singapore’s. The country had no debt mindset but has a mentality of economic success.
Debt was never thought of as salvation or sanctuary, and there were no cheers about escaping debt-default as debt default was nowhere on the country’s radar. That’s a nice place to be in, in a country which was a few decades back though of as a Third World dump.
We should not have debt on our mind, and for that we need to get out of debt altogether.
