CLASSIFIED | POLITICS | TERRORISM | OPINION | VIEWS

The Bond and the Bound

Dilrook Kannangara

After heaps of hubbub the Bond has been subscribed; in fact over subscribed by nearly three times. This is no doubt a resounding success for the cash strapped government to forge ahead their development plans according to their manifesto. At the same time the UNP that canvassed heavily, somewhat ridiculously against it is fed the humble pie as none eats it voluntarily. The Bond carries a high interest burden above 8% in US Dollar terms slightly higher than the comparable Pakistani Bond issued recently. This means an annual interest payment of over USD 40 million until the Bond is retired in five years. This is not an easy task especially when the government has taken a lenient approach towards controlling waste and improving efficiency.

The Bond increases the external debt by 4% which will take a sizable chunk of the budget over the years; it may have covenants that require spending caps with other conventional covenants of financial discipline. Obviously these do not go down well with the masses that expect the welfare state to continue in spite of the war and financial commitments. If the USD depreciates at 5% every year against the Sri Lankan rupee, the government needs to make at least 13.4% return on its investments that utilise the Bond; it should also have enough forex to make the payment without causing any hiccups in the economy. Ideally the government should increase its export income (including services) by over USD 40 million a year; otherwise the exchange disparity will expand and local inflation will follow.

This necessitates the proper management of the funds. The government has already promised that the borrowing will only go into development work; it better be. If the funds are directly or indirectly used to purchase fancy aircraft that are not in need, the economy will struggle to earn the required interest with lesser investments. Investing in the Hambantota Port project is surely a sound decision; this has the potential of tapping an untapped business opportunity.

One of the largest shipping routes runs just a few nautical miles from the proposed harbour and it stands to become a vital transit point in global trade. However, ending the war (not postponing it) is a major step in achieving a high economic growth rate plus a favourable exchange rate. To this extent the government may increase its defence spend so that a settlement may be secured early. If there are no significant armed groups in the country other than the armed forces, the police and the paramilitaries, there is no reason why the tourism industry, etc. wouldn’t expand to unprecedented proportions. Also the peace dividend will essentially come from leveraging the resources in the North and the East, especially those areas that didn’t contribute to the national economy for decades.

The present Vanni region under the LTTE can yield an economic contribution of USD 350 million (going by the GDP per capita and the population) when it is open for business; its tax revenue would be substantial; enough to pay off the annual interest payment. Although 70% of Vanni population lives below the poverty line today, the establishment of law and order therein means that its vast resources can be harnessed with ease which will raise their economy to that of the rest of the country. The fact that the Killinochchi market was one of the biggest the country had in the past proves this point. On a different count, the biggest employer will stop recruiting once the war if over making it mandatory to make other opportunities available to the youth.

Therefore, the government has taken a calculated risk by placing a heavy reliance on a successful outcome of the war. This ties them into achieving a sustainable and a working peace essentially brought about by law and order. In the corporate sector, a heavy debt burden is supposed to bring in more financial discipline. In the same token the Bond is in theory, should make the government work towards a plan in achieving law and order – loosely termed ‘peace’.

It also has a political statement. The UNP is further deterred from toppling the government as in that case the UNP will have to shoulder the debt burden. However, the UNP has been unable to bring about law and order during their recent tenure and it is unlikely that the existing CFA or another similar pact can sustain the LTTE under a future UNP leadership as the terror group regrets for not launching a striking offensive when it could in 2002-03. Any let-up on the LTTE now will mean total havoc and therefore if the UNP is to takeover the government sometime soon or even in 2010 when general elections are due, they will have to follow the present plan; else it will be an economic disaster possibly with a reduction in the government’s credit rating. It was very amateurish on the part of the Opposition Leader to threaten that under a UNP government the loan will not be repaid. If USD 500 million or part thereof is defaulted, the government’s credit rating will go down as a result making it very difficult (if not impossible) to borrow again. Credit rating agencies do not rate political parties and it is the country that will suffer. On top of that if the banking licence of HSBC is withdrawn, that will be the second fatal economic blow in a Ranil regime. On another count, Ranil has failed. His efforts of convincing donor countries not to aid Lanka have backfired. If the IC didn’t know Ranil’s incapabilities until now, it is time they learn it the hard way.

There are lessons for the international community as well. If aid cuts and like measures were the sticks they used to force an ‘improvement’ in the human rights situation, these sticks have rendered useless. A five year repayment period means a bad human rights record cannot dictate the government’s financial clout and other capabilities. On the other hand, the repayment burden may befall on the government in times when the human rights record is good! The IC should be convinced at least now that a carrot based approach is required which strengthens the institutions already in place for justice resolution.

Implanting a development oriented political culture in the North-East (NE) is a prerequisite. Sectarian politicians who were elected to parliament from these provinces over the years have wilfully neglected development. It should be noted that ACTC, ITAK (aka Federal Party), TULF, TELO and TNA that ruled the N-E was never interested in development. It was the UNP and the SLFP that were responsible for development work in the N-E. By electing anti-development and pro-separatist politicians, the Northerners and the Easterners dug their own development grave. Underdevelopment on the other hand was a boon to these sectarian politicians and their Tamil Elam goal, hence they were not supportive of growth initiatives.

Contrary to what these politicians and the LTTE say, it was sectarian politicians that preceded the N-E underdevelopment. Therefore, a strong development orientation must be nurtured in the N-E as a matter of priority before devolving power to the same set of sectarian and pro-separatist politicians. The hartal culture must stop and a progressive culture must set-in instead. Constitutional and other legal means must be devised to put pro-sectarian politicians out of office in order to pave the way for development-oriented politicians. Also it pays to carryout development work as part of an island-wide national plan than as a regional endeavour. This will further integrate the N-E to the Sri Lankan national economy. In short the N-E must be developed as part of a national agenda, not as a regional programme; the ultimate and the biggest benefactor must be the nation that spent billions of dollars to exterminate the LTTE.

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