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Although immediate debt payments can be met by Sri Lanka, to build credibility, a medium-term plan is required, a panel of eminent economists said, urging the Government to take credible and decisive action to prevent a painful debt crisis.
These views were expressed at the event "Deep Dive", organised by the Advocata Institute on Wednesday (30), which aimed to focus on Sri Lanka's biggest policy challenges.
Verité Research Executive Director Dr. Nishan De Mel noted: "We think that Sri Lanka does have flexibility, but the price of flexibility is credibility. If you cannot establish credibility, the flexibility erodes very quickly."
The event was held a couple of days after rating agency Moody's downgraded Sri Lanka's rating to Caa1 from B2, signalling issues with the country's debt sustainability. This year, Sri Lanka's foreign debt service forecast is $ 4,208.6 million. The Central Government debt-to-GDP ratio at present stands at about 86.8%, with some estimates expecting the figure to increase.
Prof. Ricardo Hausmann from Harvard University said the more important measure to look at is the interest burden-to-tax revenue ratio, as opposed to the commonly cited debt-to-GDP ratio.
"I think it's unfortunate that people talk about debt-to-GDP ratio. Instead, they should be talking about the interest burden-to-tax revenue ratio. Japan has a debt-to-GDP ratio of 230%, and it's all contracted at a 0% interest rate. 230% at 0% interest rate; you have to raise zero taxes to pay for that. 86% debt at 7% interest rate; you're talking about almost 6% of GDP in interest burden, compared to Japan that has to pay zero. Sri Lanka has one of the worst interest burden-to-tax revenue measures in the world,” said Prof. Hausmann.
Prof. Mick Moore, who has done work on Sri Lankan taxation systems previously, explained that the situation has worsened due to a revenue problem and urged the need for a collective realisation of the necessity of higher taxation to meet debt servicing requirements.
"If there is going to be a social contract drawn or built up, it's going to have to be a social contract around the crisis. If we do not do something about tax raising, like Prof. Hausmann said, the big bad wolf (the debt crisis) is going to come.”
The event was moderated by former Central Bank of Sri Lanka Risk Management Department Director Dr. Roshan Perera and Advocata Institute Research Manager Aneetha Warusavitarana. As a precursor to the event, Advocata released a primer on debt sustainability with the aim of helping Sri Lankans understand the topic.