by C.A.Chandraprema Courtesy The Island

On Wednesday February 7, 2018, the day on which campaigning closed for the local government elections, the Auditor General Gamini Wijesinghe called a media conference and made several explosive statements about Sri Lanka’s state of indebtedness. His statement received wide publicity over all TV channels. The Auditor General distributed a document titled “Public Debt Management in Sri Lanka” dated February 2, 2018 to journalists at this media briefing. The other side did not have the time to respond to his comments before the election. The words of the Auditor General taken from the Derana news bulletin were as follows:

“If anybody asks me what the debt of the country is, I will have to tell him to ask Vaima (the son of God Sakra). I can’t say what our national debt is because the management of public debt has been turned into such a mess over the past ten years….There has been excessive recourse to debt and the debt limits set by parliament have been exceeded. Debt has been shifted to other places to conceal the excessive debt…. The former Secretary to the Treasury referred to by some as an ‘economic assassin’ has done much to destroy the financial discipline of the country…The debt figures compiled by the finance ministry include only transactions that go through the consolidated fund. The debt of the provincial councils, local authorities and state enterprises have not been included in the public debt figures of the finance ministry, resulting in a situation where there are piles of debt everywhere….”

“It may be the case that long term loans with payment periods of 30 to 40 years, instalments may still be being paid even after they had been paid off in full…..Over the past five years, a lot of loans were taken and we are now in the grace period before the repayment of these loaans commence… All this happened because the Treasury Secretary began to work under the President with his powers…. If the Kapuwa defecates inside the devale, the God does not make an issue of it….”

In the part that Sirasa TV broadcast of the Auditor General’s speech, he was shown stating among other things that “Debt according to the records of the Central Bank is Rs. 10 trillion but the balance sheet contains only Rs.1.1 trillion in assets. Because they could not control debt, they concealed the debt. The loans taken for the Norochcholai Power Plant are with the CEB, and the Loans for the Mattala airport and the Suriyawewa stadium are with the Aviation authority and loans amounting to Rs. 136 billion taken for rebuilding rural roads are with the RDA. The Pensions Dept. has loans amounting to Rs. 37 billion taken to pay pensions and the interest payable for this money amounted to Rs. 1.3 billion in 2016.”

This was the Auditor General of the country telling the public that he has no idea of how much the country owes. The very next day, the Central Bank moved swiftly to control the damage. The CB issued a media release without referring to the Auditor General but to ‘recent media reports about the recording of government debt’. In this media release, the Central Bank has stated among other things that “the CBSL compiles and publishes Central Government debt based on its database on issuance of domestic debt and international commercial borrowings on behalf of the Government and also the information it receives from the Ministry of Finance and the External Resources Department…Central Government debt so compiled by CBSL has been reviewed and accepted by international agencies including the International Monetary Fund… to date, the Government of Sri Lanka has maintained an unblemished record of debt servicing…” The anxiety of the Central Bank to set the record straight was understandable. What got Greece locked out of the international financial markets and caused its spectacular financial collapse was the admission that it had been understating the size of its budget deficits.

How could the Auditor General not know?

Regarding the claim that the Auditor General is unaware of the total government debt because the figures compiled by the finance ministry relate only to debts that pass through the consolidated fund and did not include the debt of the state owned enterprises, provincial councils and the local authorities, it has to be pointed out that according to Article 154 of our Constitution, the Auditor General’s assigned task is to audit all departments and agencies of the central government, each and every public enterprise where the shareholding of the government is 50% or above, and all provincial councils and all local authorities – each taken separately. Article 154(5) of the Constitution vests the Auditor-General with sweeping powers to enable him to carry out his duties, making it mandatory for information to be provided to him and giving him as access to all books, records, returns and other documents, stores and other property belonging to the institutions that come under his jurisdiction.

According to Article 154(6) of the Constitution, the Auditor-General is mandatorily required to report to Parliament within ten months after the close of each financial year and as and when he deems it necessary, on the performance and, discharge of his duties and functions under the Constitution. It should be noted that the Auditor General’s responsibility according to the Constitution is not just to audit the yearly accounts but to make interventions “as and when he deems it necessary”. Moreover the position of Auditor General is an independent office answerable only to Parliament. Since it is the Auditor General’s responsibility to audit each and every agency and department in the central government, and each public enterprise, each provincial council and each local authority separately, he is the last person in this country who can say that he is unaware of how much money each such body owes and to whom.

When the Auditor General says that the debt owed by the public enterprises, the provincial councils and the local authorities have remained unaccounted for the past ten years, that raises the question as to how the four or five Auditor Generals over the past ten years including Gamini Wijesinghe himself had been signing the audit reports of these bodies all this while. Furthermore, there are only a limited number of state owned enterprises, a limited number of provincial councils and a limited number local authorities all of which fall under the direct jurisdiction of the Auditor General and if he comes before the public and claims that he does not know how much these bodies owe and to whom, the Auditor General should be removed from office immediately because he has not been doing the only task assigned to him. Furthermore, our local authorities and provincial councils cannot borrow money from overseas and they would borrow money only from local banks. Even our state owned enterprises will borrow only from local banks.

Only one or two of the best state owned enterprises like the National Savings Bank will have the clout to be able to raise money in international financial markets and that too only with a Treasury guarantee. So even the local banks will be able to provide the Auditor General comprehensive breakdowns of how much they have lent to what government body. Thus the Auditor General can collect the debt data from each public enterprise, provincial council and local authority and combine it with the debt passing through the consolidated fund and announce the sum total of public debt to the public.

Example of the RDA & the PCs

The Auditor General also charged that the Road Development Authority (RDA) which is not a revenue earning body also had debts of Rs. 136 billion, thus suggesting to the public that some shady practice has been going on. However in actual fact, Section 15 of the Road Development Act No: 73 of 1981, which goes as follows, expressly permits the RDA to borrow: “The Authority may, with the consent of the Minister, borrow temporarily by way of overdraft or otherwise, such sums as the Authority may require for meeting the obligations of the Authority in discharging its duties under this Act. Provided that the aggregate of the amounts outstanding in respect of any temporary loans raised by the Authority under this section shall not at any time exceed such sum as may be determined by the Minister in consultation with the Minister in charge of the subject of Finance.”

According to Section 14 of the RDA Act, the RDA shall have its own Fund, to which shall be paid all such sums voted for the RDA by Parliament, and all such sums of money as may be received by the Authority by way of loans, donations, gifts or grants from any source whatsoever. The RDA Act also lays down the purposes for which the Fund of the Authority can be used. “The Authority may utilize the funds of the Authority for the purpose of defraying any expenditure incurred in the management of the affairs of the Authority, the transaction of business of the Authority, the payment of remuneration to the employees of the Authority, the exercise of the powers and the performance of the duties and functions of the Authority…”

Hence, any loans taken by the RDA are perfectly legal and they are meant to be repaid as and when Parliament votes funds for the RDA through the annual budget. Most if not all state owned enterprises such as the Ceylon Electricity Board and the Ceylon Petroleum Corporation are authorized by their Statutes to borrow and repay loans and these function for the most part are like what prevails in independent business enterprises; the only difference between such enterprises and a private company being that the state owned enterprises are owned by the state whereas private companies are owned by individuals. The functioning of the state owned enterprises is a matter that is specifically dealt with by the IMF in its Article IV consultations with the Sri Lankan government. The IMF has been pushing for market pricing of electricity and fuel so that these enterprises will be able to run on their own incomes with no reliance on fund infusions from the government.

Sections 35 and 36 of the Provincial Councils list in the Ninth Schedule of our Constitution confers on the Provincial Councils the power to borrow money and to levy certain taxes and fees. Under Section 154R(3) of the Constitution, the Central Government is obliged to vote from the annual budget only such sums as are necessary to meet the shortfall between the revenue of the provincial councils and the funds necessary for them to function. Hence the both the debt and the revenue of the provincial councils do not appear on the books of the Ministry of Finance and the Central Bank. However the Auditor General has access to all this information in the provincial councils as well as the local government institutions because he has to audit them as well and he cannot claim ignorance of what the outstanding liabilities of these institutions are.

Even though the Auditor General claims to be clueless about the money owed by the state owned enterprises, the provincial councils and the local authorities, we don’t seem to hear of any local authority or provincial council or a public enterprise that has been denied credit by a bank for default. That we have not heard of such a thing even in the chaotic situation following the election to power of the yahapalana government appears to be testimony to the resilience of the system.

The ‘assets’ of the nation

One of the most questionable statements made by the Auditor General was that the country had borrowings of more than Rs.10 trillion in its books but that the assets of the country were only Rs. 1.1 trillion. The universal method of measuring the level of indebtedness of a country is to measure the total debt against the GDP. It is the growth in the GDP and the increase in government revenue that determines our ability to repay our debt. While this is the basic way of measuring debt used by all nations, it would appear that some countries have a convention of indicating the estimated value of a nation’s assets in its ‘balance sheet’. Privately owned companies indicate the value of their assets in their balance sheets which means the total value of the land, buildings, equipment, patents, rights, and even furniture and fixtures they may own. In fact as far as a private company is concerned, the balance sheet may be more important than the profit and loss account. Even if a private company has been making losses in its profit and loss account for years, still if it has more assets than liabilities, the company is still officially afloat.

Those of us educated in Sri Lanka would be quite familiar with the idea of a private company having a balance sheet but we were never taught to look at a country’s balance sheet with assets and liabilities! When a nation also adopts a convention of indicating the value of its assets, that means the value of everything in that nation to which a monetary value can be attached. Deposits of minerals, cultivated and uncultivated land, the value of every house, building, car, lorry, patent, and tourist attraction and the value of the human resources in that country can all be categorized as the assets of a nation. All this is added up and a notional figure of ‘assets’ of the nation are produced. Thus we see some writers claiming that there is nothing to be upset about the USA being about 19 trillion dollars in debt because the assets of the USA run into hundreds of trillions of dollars! Trying to measure the debt of a nation against the value of its assets serves no purpose other than to provide some psychological comfort to the inhabitants of that country.

If Sri Lanka also began giving notional values to our assets, the debt of 10 trillion will look trivial indeed. The land prices in Colombo rival that of developed Western countries. What should be understood is that different conventions apply to the accounts of a private company and to national accounts. While the assets vs liabilities balance sheet will be all important in a private company, it has little or no relevance for a nation state. For a nation state, what counts is the debt to GDP ratio and the revenue figures. In Sri Lanka it is the Department of State Accounts in the Treasury that compiles the national accounts in keeping with accepted international accounting conventions.

Our Department of State Accounts does not include an estimate of the value of the total assets of Sri Lanka. You cannot seek a correspondence between the debt incurred and the assets of a nation. If a project is being built with a loan, then there will be some correspondence between the debt incurred and the asset that is left at the end of it. But if a World Bank loan is taken for poverty alleviation, there will be no physical asset at the end of the programme unless you attach some notional value to human resources. In every nation in the world, as in Sri Lanka, a large proportion of the debt incurred is for recurrent expenditure which leaves no asset remaining. If the USA is 19 trillion dollars in debt, there wouldn’t be many assets that have been acquired with this 19 trillion dollars.

In a private company, the debt of the company appears as a liability in its balance sheet along with all its tangible and intangible assets. But national accounts are not prepared in that way. Those of us educated in this country have been looking at GDP figures and government revenue figures budget deficits and the like but we have never had a practice of looking at the assets of a country! Fortunately for us, the financial markets and the multilateral agencies such as the IMF that do business with Sri Lanka are well aware that this country was turned into a madhouse after 8 January 2015, and they do not take the pronouncements by leaders of this government seriously. Recently, when the President said that the country was Rs.10 trillion in debt but had only Rs. 1.1 trillion worth of assets to show for it, the former Governor of the Central Bank issued a statement to Reuters asking the financial markets not to panic and that the Sri Lankan leaders don’t know what they are talking about.

Now no less a personality than the Auditor General of the country has personally held a press conference and echoed the President by saying that the country was Rs. 10 trillion in debt and had only Rs.1.1 trillion in assets to show for it. Still, no one seems to have taken the slightest notice. The stock market did not collapse, and the exchange rate did not go haywire. Anywhere else in the world, the kind of pronouncements made by the President, the Prime Minister and now the Auditor General would have immediately resulted in a collapse of the economy and we would have been locked out of the international financial markets. Here miraculously, the country is still afloat despite the bizarre statements being routinely made by holders of high office. The question that all this raises is, how long can this irresponsibility continue before the chickens come home to roost?