UNP Parliamentarian and economist Harsha de Silva in a hard hitting interview with the Daily Mirror warned that Sri Lanka was heading for a disaster because the government was borrowing and borrowing at high interest rates,not for development ,but to repay earlier debts.Exposing the whole facade and false figures given by government officials,he said the honeymoon with China was over because China has achieved its objective in Sri Lanka and anymore loans would be on tougher conditions.Here are some excerpts from the interview.

Q: Massive loans are being taken for various projects and our debt ratio to the GDP is as high as 57 percent. How will this trend affect the county's economy?

A: We are certainly going in the wrong direction in term of debts. There is no question that we are on an unsustainable path. As things stand now, the tax revenue of the Treasury is not sufficient to pay the debts. This includes the capital repayment and the interest. So what it means is we borrow to repay. So it is borrowing from one person to pay back to another person. Furthermore, our tax revenue is insufficient to meet our recurrent expenditure. This incurs a deeper deficit in the current account of the Budget. So when the President sometime says we are borrowing for development that is factually incorrect. It has become difficult to pay salaries and pensions in general and to provide food for the military.

Not being able to pay these bills means not being able to meet the recurrent expenditure. So there is no choice other than to borrow. Let's see what kind of borrowing we are making at present. Those days we used to borrow 'on soft conditions'. We got 10-15 year grace periods with 35- 40 years to repay the loans. The interest rates of those loans were in the region of 2.5 percent. Now this interest rate is as high as 9 percent. This is far too much to bear.

Two weeks ago, when the government borrowed through the National Savings Bank, it did so at 9 percent. That is 8.9 percent plus fees. So that surpasses the 9 percent threshold. We have never borrowed at these rates in the history of Sri Lanka. If you look at the borrowings from the Exim bank of China, the interest rates are sometime as high as 6.25 percent plus fees. An example is the borrowings the government obtained for the Hambantota Port. They were at 6.25 percent fixed interest plus fees. So the reality is that we have to pay increased interest rates. One can't imagine how long we can sustain the circular flow of funds. From an interest rate of 2.5 percent to 6.25 percent and then to a further 9 percent is staggering indeed.

Meanwhile last year's Budget allowed private banks to borrow from overseas sources so that the government could borrow from them for its useless projects such as beautification projects and road carpeting projects which do not produce monetary gains for the country. Last week the DFCC bank was forced to borrow at 9.6 percent plus fees from the international bond market. So what's happening is that the government is using the country's bank system for the purpose of collecting funds for the government. As we all know the Employees' Provident Fund was subjected to a similar fate.

Favoured individuals were appointed to high positions of the Central Bank, and they are now directing bank lending towards unsustainable government projects. So to close this loop, we are now entering into the danger zones. All the rating agencies including Fitch Ratings last week warned us that we were getting into a situation where we would find it extremely difficult to service our high cost short term debts. And however much the Central Bank downplays such opinions, international investors take into account these liabilities which could lead to debt default. In fact, these agencies recommend a rate for investors to lend money to us. We are borrowing at unprecedented rates of interest.

Q: Compared to previous governments, the Rajapaksa government seemed to be more dependent on loans from China. Why is China so interested in giving loans to a country like Sri Lanka? Do you see any political danger in this?

A: China has no interest in Sri Lanka. China's only interest is China. And Sri Lanka's location is crucial for China's future. It sits at a very strategic position on its sea route which China is using to transfer raw materials from Africa. The 'String of Pearls', the ports it is building in the Indian Ocean; Myanmar, Chittagong in Bangladesh, Hambantota in Sri Lanka, Gwadar in Pakistan. All of these are the pearls in this string of pearls. They seek to secure the safety of their shipping lines right round the Indian Sub-continent. Also, China became very important to Sri Lanka during the war as they asked no questions about human rights or anything like that when they were selling us weapons. It was a win-win for Sri Lanka and China. The economic relationship began after that.

The need for Sri Lanka was military equipment and for China it was a foothold in Sri Lanka. Now it is stronger because we seemed to be begging the Chinese for money as we don't seem to be getting any money from anywhere else. I think this honeymoon is coming to an end in terms of Chinese money being strewn around. This is so because it has already got what it want. Its strategic objective has already been met. It has set up a Port in the South; it has set up a Port in Colombo. That is sufficient.

And even though it is not for military use at the moment; when we can't pay the loans particularly for the projects in Hambantota and Mattala, it can easily be converted into military facilities for landing fighter aircraft in Mattala and to anchor aircraft careers and military or rather warships in Hambantota. So hereafter, I predict that the terms and conditions for financial assistance will become even more stringent.

Q: Where most of the loans are concerned the condition are not revealed to the people. Should there be more transparency with the people having the right to know more details and condition for these loans?

A: You know it is funny that after so long in Parliament the question about the rate of interest on the loan for Hambantota Port had to be revealed on a question I asked only a few weeks ago. The people didn't know and still we don't know as a members of parliament why it was done and how it was done. But the loan that was taken on a variable basis, the LIBO rate or London Inter-bank Operate which was high was changed to a fixed rate as the LIBO dropped. So when the interest rate was agreed upon at the beginning it was LIBO plus point 9 percent (0.9%) basis. LIBO at 6 percent, so it was six plus point nine percent (6.9%). The LIBO crashed. When the LIBO came down they fixed the rate at 6.3 percent.

Q: Why was this done?

A: I repeatedly ask this and it is in the Hanzard now. Now LIBO is 0.4. Point four plus point nine (0.4+0.9) would be 1.3 %. So we pay 6.3 as oppose to 1.3. How many times more? So there is no right to information. Questions in parliament are not answered. Information is not made available to the public. If it is a world bank or an ADB loan everything is in the website and you can get it from there. The terms and conditions for the Katunayake Expressway have not been revealed yet. These are all non-transparent deals. So loans are being taken, terms and conditions are not revealed. There is an important constitutional issue comes up.

The Center for Policy Alternative filed a case in the Supreme Court just before the Budget last year saying the Appropriations Bill is inconsistent with the Constitution and because under article 148, the Parliament has control over finance and therefore as we are entering into a high interest rate in the short term borrowing regime.

The government must get approval of the parliament prior to getting into these large foreign borrowings. And the Supreme Court Bench consisting of Justices Shirani Tilakaradena, Priyasath Dep and Eva Wanasunsara ruled that the Appropriations Bill was in contravention of the Constitution. For whatever reason the court did not say what to do with it and the government ignored it and went ahead. And this time the President had wanted to make sure that he took care of the house keeping matters and requested for an opinion from the Court.

Now he has added a new sentence saying whatever the previous legal opinions of this matter be this is how it is going to be done and there is no change. We are not privy to any of these. This is what we hear about it. So they borrow and the parliament can't intervene to ensure that the future generation of this country will not be burdened with repayments. The future generation will have to bear the brunt.

Source: Daily Mirror - Sri Lanka