Page 1

Rupees
OOO
million
5O
O

Page 2
THE CHANGN
COMPOSITION OF PUBLIC DEBT (SHOWING GROSS & NET PUBLIC DEBT)
MTLLIONS OF RUPEES
8OOO Non-Project (Commodity) Loans 溪
-- 75OO – Fಣ್ಣ: Project Loans 75
Sterling Loans TOOO - 1 Central-Bank Advances
BonesC Taz Reserve Certificat es 65OO - LOANS Treasury Bills
Rupe e Loans
6OOO
55OO
5OOO
l;5OO
l+OOO
35OO
- 3OOO 一级 _了。面 25OO
20OO ܚܫܝܓ
in 15OO 曲 一卧 1OOO
5OO
-- L. - - O
1960 - 61 62 63 64 65 66 67 68 69 70
GROSS PUBLIC RER, LESS SINKING
Financial year ends 30th Sept.
COMPOSITION OF PUBLIC DEBT
| 71LLIONS CF RUPEES MILLIONS OF RUPEES 60000 60000
DOMESTC CEBT ՃՌՈ() ծ ---------5500 هس-سسسسسسسسس 55,000 DGBT * 55000
500O) ခြိါ - 50000
l5000 45000
40000 40000
35000 35OOO
30000 30OOO
F:- - 25OOO بم ----------------------------------س--------------------------------------------ه 5000 ?
20୦୦୦ -& " لا أننا سمسم 20000
赣 15000 :”ما -___ــــــــــــــــــــــــــــــــ_________ـــــــــــپـَــــــه 15000
10000 -ه 10000
5000 a- 5000
0. e- ర్గ ర్గ X O
79' 78' 7ךי 76' 75' 74' 3ך' 72' 71' 1970
sk Gross Public debt less. Sinking Funds
 
 
 
 
 
 
 
 

G DEBT SITUATION
OWNERSHIP OF PUBLIC DEBT.
M46NS OF RUPEES MILLIONS ÓF RUPEES 8000 2000
frysur crice Funds Sinking Funds Savings institutions
0 - 6000 600 commercial A Co-operative Banks
Cantrot Bank $500 - 500
5000 5000
4800 2500
4000 !.000
350)
300
500
2000
15C)
jú
so - 蠶 韃 శ్లో 500
1967
gि:
0. O
financial year ends 3oth september,
COMPOSITION OF DOMESTC DEBT
MILLIONS OF RUPE ES MILLIONS OF RUPE E S
30OOO 30000
OTHER
°一团霹。 - 2 - 2800)
: TREASURY BILLS | TAx RESERVE CERTIFICATES
24000- E CENTRAL BANK AdWANCES
26000ー
2000 م
22000 - 22000
200 CO -2000 مO
18OOO 18000
16000 16000
14000 - 4000
% 须 - 2000 2000 昧 1000) 貓 - 10000
6000ー須 貓 6000
须 须 % 貓 4000 貓 组组 سه A000 2000 - 製 3. 觐 2000 O - O
1970 * 71 '72 '73 77% '75 '76 '77 '78 '79 '80

Page 3
*、鬣。
Schaam A.
(652
s CONCAC ΕΕΔΥΕΛΛΑ με τη στη σεια το リリ SLS S S S S S S S S S S S S 0SGS S SJSLSLS リリ リcm os
eerstegesies e 5 ECONOMIC Reviv is a conny Servicg, project of Eēki
ee het festift of do e consideros crie リG | Ումմ ոScGSSՅքիի :e:Աet :si:: policies of *、 リ。 a*曇pèsà羲* authors anggo no represente
Sinta con su cas es veas *** リe walccm。 s 3CONCACEV is ablished roy and is a リ
Volkäste 7
Juan C. Sanché
M. ÎWadarajah
S. T. (G. Feria,
NEXT SSUE
& Education
è Role of Pa
The Budge
COVER
Palitha
 

Narmer 6 September 1981
CONTENTATS
FEATURES
z Arnau 21 Debt and Developmeat
26. The Rubber Market Situation
SPECIAL REPORT 3 THE PUBLIC DEBT
3 Challenges and Sacrifices: An Assessment of
the Growth of Sri Lanka's Public Debt in the light of Debt Theory
9 Debts-Relief and indicators
-A World Bank View
COLUMNS
2 Diary of Events : July-August 1981
20. The Economy . Deteriorating Terms of Trade and Balance of Payment Problems
and Development-An Analysis of the Sri Lanka Situation wning in the Market
t
Kannangara

Page 4
July
O
15
1.
2.
Diary o
The Government raised the authorised limit on Treasury Bills from Rs. 10,000 million to Rs. 13,000 million, by a resolution adopted in Parliament. The earlier Rs. 10,000 million limit had been adopted in December 1980.
A Sum of SDR 37.5 milion (approximately RS. 825 million) was drawn under the IMF's Extended Fund Facility (EEF) arrangement. With this drawing, Sri Lanka has obtained a total of SDR, 185.0 million under the EEF arrangement.
The International Development Association signed an agreement with Sri Lanka for a loan of SDR 24.5 million (approximately Rs. 526 million) to finance the Willage Rehabilitation Project, designed to rehabilitate 1,200 village irrigation and minor irrigation schemes by the Department of Agrarian Services, with a view to improving water management programmes. Sri Lanka, will receive a grant of Canadian Dollars 30.5 million (approximately Rs. 475.5 million) according to an agreement signed with the Canadian international Development Agency. The proceeds of the grant will be used for the purchase of fertiliser.
The Asian Development Bank will grant Sri Lanka. a loan US Dollars 10.0 million (approximately Rs. 187.4 million) for a project to be undertaken by the National Development Bank (NDB) for financing by the NDB of specific industrial development projects by disbursing loans for productive purposes in the public and private sectors and also for the provision of consultancy services.
The government reduced the export duty on rubber by a Gazette Extraordinary notification in order to provide margin to producers. The operative floor price applicable to ad-valorem export duties was increased from Rs. 8/80 to Rs. 10/- per kilo; while for FOB prices ranging from Rs. 17/- to Rs. 20/- the new duty rate was 75% as against a previous 50%. This results in a foregone government revenue of an estimated Rs. 300 million per anuum.
August
5
3
The Government agreed to a recommendation from the Minister of Finance that the terms of , an Eurodollar loan of US $ 75 million, negotiated by his Ministry with the Chemical Bank of America syndicated jointly with the Bank of Tokyo and Indo-Suez Asia Ltd. be accepted. This loan has been negotiated to Support the Balance of Payments for 1981. The Cabinet accepted in principle an “urgent and essential forestry development programme estimated to cost R.S. 66.3 million between 1982-86. A further US $ 5 million World Bank loan, for financing this programme, is to be negotiated.
In view of the prevailing low export prices (f.o.b.) the Government withdrew the specific export duty

f Events
of Rs. 1,650 per metric ton levied on coconut oil. This measure is expected to provide a reasonable margin to exporters of coconut oil.
5 Import duty levied on the import of live horses,
aSSes, mules and hinnies Was reduced frO Rs. 20,000F to Rs. 5,000 per animal.
盘了 he Central Bank of Ceylon increases the bank raie - the rate of interest on advances to Connercial banks Secured by the pledge Off Government and government guaranteed securities - from 12 per cent to 14 per cent per annum. However, the Refinance facilities for exports remained unchanged at the prevailing rate of 12 per cent.
19 The Cabinet agreed to a recommendation. Of the President, in his capacity as Minister of POWer and Snergy, that a Committee be set up to consider the constraints on power and energy supplies and study and report on the options available to the Government. It was noted that severe power shotages could occur over the next three year and early neaSures Were very necessary.
2. Saudi Arabia, will hold its oil prices at $32 a barrel until the end of next year, Saudi Oil Minister Shiekh Yanani announced at the end of an OPEC meeting in Geneva. At the same time, Saudi Arabia, responsible for about half of OPEC's output, decided to cut production in September by 1. million barrels a day to 9 million barrels per day, reported the London Financial Times.
26 The Government approved a tender for the Rs. 217 million administrative complex of buildings in the new capital at Pellwatte to a British Construction firm, on the recommendation of the Prime Minister.
27 LLLLLL S LLLL SLLLLLLH LcLk0LLS 0LLS SLLLLLSSLLLLS SLaLaLLLLL LLLLLLLLS LLLLCS
US $ 12 million and US Dollars 8 million respectively towards a US $ 30 million (approximately Rs. 575 million) project aimed at increasing the production of coconuts from Smallholderos plantations and improving quality of their products, the Secretary of the Coconut Industries Ministry announced. Under this 5-year project 17,000 acres of coconut land are to replanted, 65,000 acres rehabilitated and 5,500 acres intercropped.
The latest four week session of the UN Conference on the Law of the Sea ended in Geneva, with delegates from 150 countries confirming that they Will conclude the treaty in April next year with or without US participation, reported the London Financial Times.
The Moneary Board of the Central Bank announced the rules it framed under Section 18 (2) C of the Control of Finance Companies Act No. 27 of 1979, whereby finance companies soliciting deposits from the public through advertisements are required to furnish specific information to their prospective depositors. These rules come into effect from 1st September, 1981.
ECONOMIC REVIEW, SEPTEMBER 1981

Page 5
Challenges and Sacrifices: An Assessment of the Growth Sri Lanka's Public Debt in the Light of Debt Theory
S, T. G. FERNANDO
FORE 16N beg
QNESTC )ER
76 at 9, 9 &
PUBLIC DEBT (GROSS)
A quick assessment Of Sri Lanka's ecOnOmic performance, though not urgently, is yet, opportunely called for as a convenient background to See the recent growth in public debt. It is now almost four years since the experiment of a liberalised economy was initiated. The policy objectives, aspirations and results Of this eCOnomic experiment require closer study. One fact is clearly discerInible. The contrast between the pre 1977 and post 1977 economic environment is marked.
The gains todate are considerable and deeply satisfying. The
EconoMIC REVIEw, SEPTERIBER 1981
RyAPEES 0O8 MN:
SS
ᎦᏍ
Dr. Fer
of Ecc
Central
3.SShe
so as Ch
Bank. T
45 in this
the auth
represel
4-d of eithc
or the
S
3 Q
2S
2C)
O
S
C
8
MONTHLY.
new economic pol the way for a fr economy exhibitir duction or comple a wide array of c and paper work ket Oriented Opé duction, resource distribution. Οι arrangement has nalling system O. based On compar scarcity value, pr stimulate new throwing into bol ficiency of protect tered enclaveS. TI
 

of
nando was Director nomic Research, Bank, before he di duties recently a ii r ma n, People's he views expressed paper are those of hor and in no way ht the view—points er the Central Bank 'eople's Bank.
icles have paved eer economy; an g a drastic rete elimination Of ontrols, licensing to permit marrations Of proallocation and ut of this new arisen the sigrelative prices ative COsts and ices designed to activities while relief the ineflonism and shellhere have been
singularly remarkable strides made in fostering export activities, in banking and in commerce and in the mobilisation Of domestic savings, the latter through interest rate profiles which have made financial investments an attractive propOsition. Above all there has been a breakaway from a fixed and intransigent development plan to a more practical and relevant rolling plan based wholly on the Capital projects of the public and corporate sectOrs.
The acceptance of an investment prOgramme for 1981-85 haS Outlined in time perspective, the contours of a massive capital development programme linked to four lead projects. All these gains and achievements have been Worked out amidst the most turbulent of economic circumstances and adverSitieS. Critics Of liberalisation have not hesitated to draw parallels from the experience of the previous regime of controls to argue for welfarism and restraint On growth or profits in the national accounts. The relative shares or distribution of profits and wages in the national account is only partially determined by the degree of monopoly and rate Of profit On capital. In a developing situation besides the relative shares Of income, labour and capital, the expanding size of the national income resulting from the process of development is worthy Of attention. It is this apparent result which is swept aside, ignoring in other words the years of Stagnation and stagflation which pervaded nearly all spheres of economic activities in the seventies.
The economic scenario Of turbulent CirCulmStanCeS which rocked so severely and dangerously the economic programme Of the Government in 1979 and mOre dramatically in 1980 were conditioned by the gloomy world economic situation. What were the economic circumstances in the World outside which so pervesely conditioned the economic performance of the export-import economy of Sri Lanka? To the rude economic shocks of the early seventies caused by the first oil price hike, unprepardeness to meet Such an eventuality, protectiOnism and cOnServative ImOnetarism, the late seventies witnessed the painful economic adjustments of third World developing oil importing countries to the globall recession permeating the industrial Countries. High and UpWard Swings in energy COStS, unpredictable, fluctuating and volatile foreign exchange movements of key currencies, dampened world trade growth, lagging demand for primary products, sharp
3

Page 6
ly declining prices of primary productS are SOme Of the mOre immediately relevant circumstanC€S.
It has been remarked that the eighties would reveal an equally dismal Scenario of poverty and painful adjustments for the poorer non oil producing developing countries. In 1981 unfavourable developments are predicted on the basis of estimates made by the world, monetary and lending institutions. It would appear that Balance of Payments deficits would have to be covered increasingly by additional debts abroad. Because of the high interest rates in industrial countries, the terms for future borrowing will remain unfavourable prompting poorer countries, least able to withstand such burdens, to have recourse to comInercial bOrrOwing in Sheer deSperation to avoid defaults On Obligations. The servicing of existing debt Would be a further burden with the result that even the securing of new loans would be difficult. In such gloomy circumstances the line up for imnaediate debt relief and grants and highly concessional terms of development aSSiStance would lengthen, unless the World scena#? were to change dramatical
V. >
While the circumstances leading to debt negotiations for rescheduling of relief altogether would depend on individual country situations and Stabilisation measures to be implemented, the fundamental circumstances for suich a predicameint could be traced to balance of payments deterioration and through same for excessively expansionary fiscal and monetary policies. Worsening terms of trade, export shortfalls, reduction in inward remittances, reduction in tourist earnings and a hardening of borrowing terms leading to higher servicing costs are likely to figure importantly as influencing the balance of payments situation and the resource gap. A further unsatisfactory trend has to be underlined, namely the disagreement inow openly Witnessed between Debtors and Creditors for re-structuring external obligations and the continuing disagreement on the length of the consolidation period and terms of repayment. These factors make it likely that the external debt problem would remain with the pOOrer countries, and Sri Lanka, tOO, would despite her heroic efforts to hurry her programme of development be faced with debt servicing problems of an excruciating character. The study of Sri Lanka's public debt growth and its assessment is therefore likely to be relevant and urgent.
4 * For tables refer page 12 onwards
The managemer haS a SSU med incre and economic signi. years because Of magnitude of pul The significance of to be aSSessed in t certain key macro-e ships. Paragraphs f voted to such an ex
As at the end C the gross public de stood at R.S. 51,65. against R.S. 7,873.2 tember 1970, RS. 3, Segtember 1964 and lion at the end of his growth in pu conceptually related gross domestic pro factor cost prices an appropriately, total to G.D.P.) is reck venient indicat Or O public debt. The ra Se vicing cOSt Of Su cidates through cai) tional relationships
Yent capital expend financed mainly fr growings) have COnt) productivity and the disrestic product. ships of net debt worked out for thre 1959 to 1964, 1970 t to 1980. It is seen th
39-1964 tOital net raged 38.01% of G.C O7-1974 it af etage net debt for the re 1980 revealed a ph figure of 65.2%. Ir gross donestic roney terms at cu prices risen at a slo public debt and th of public debt in t Sources appears to yief in view of
rates of growth of
Resources abSO public debt are ne in the 1970-74 and as compared with acceleration in the in ost, marked.
There are Striki ferences of OpinioI hic effects Of an lic debt. Where the scrutiny of public evident that differe) wail as to whether ing, a curSe Or a: feren Ce. DiscussiC financing for eCOInt have revived this i rently have done b: Settle it. Those ac the Keynesian fran sis have favoured and have di SmiSSed the “burden' Of t years with the ge that an internally
 
 

lt of public debt asing importance icance in recent the increase in olic borrowings. this growth has he perspective of conOnic relationollowing are deKamination.
f December 1980, bt Of Sri Lanka, 5.6 million as million in si Sep787.4 milli Om in R.S. 1,145.0 milSeptember 1954. blic debt can be to the value of duct at current d the ratio (more net public debt Oned as a COnf the weight of tio measures the ch debt and eluital-output funcWhether governitures (which are om public boributed to higher 2 growth of grOSS The relationto G.D.P. arᎾ e periods namely, O 1974, and 1975 hat in the period
public debt aveJ.P., in the period 55.7% and total cent period 1975enomentally high other Words, coduct has in Trent factor cost Wer rate than net e servicing cost term S of Greall rehave grown heathe differential the two itemS.
ribed to finance cessarily higher 1975-80 periods 1959-1964. The period 1975-80 is
ngly marked difOn the eCOIOincrease in puhre has been close jebt theory it is hCes Of VieWS Osethey are a bleSSmatter of indifS Qf deficit mic development SSue but apparely anything to herents following Le-work of analydeficit financing the question of he debt in later neral statement held debt impo
Ses no eCONOmic burden. On the Other hand, those who have made special studies of the latter question and who favoured the classical methodology of reasoning, monetarists with inflaionary and purchasing power the0rus find themselves admitting that inflation makes the burden of debt less severe on future generations. Nevertheless, they argue for control of money Supply and inflation thus discussing the growth of public debt in terms of real output and produetivity growth, to arrive at a different conclusion. The Statistical trends noted above are seen in Table 1. *
The principal factor underlining the increase in magnitude of public borrowings has been the expansion in total payments of government. The expenditure of government, current and capital outlays, has been increasing faster than the ability to {Zobilise financial resources by Way Ci baxes, PTOfits Of nationalised ventures, borrowings of real savings Of
the gublic and revenue receipts Secured through Other fiscal and budgetary devices. The insufficiency
of total receipts to match total expenditure has necessitated the running of large and increasing budgetary deficits (cash operating deficits) and the financing of these deficits has been through continued recourse to public borrowings from both bank and non-bank SOurces.
An examination of financial statistics of budgetary outlays would reveal that the totals of current reCeipts of government have increasiggly failera short of total paymentS. in the period 1964-65 to 1974 as well as 1977 to 1981, the unfinanced gap i.e. total payments of government minus current receipts, has shown a regular increase. The gap in 1964-65 was Rs. 463.8 million, this had reached Rs. 1,46.8 million in 1974 and R.S. 14,617.6 million in 1980 (provisionally estimated). The trend observed for the sixties and to date is in contrast to the performance in 1954-55 when total current receipts exceeded total payments by Rs. 173.3 million and the gap in 1955-56 was as small as Rs. 63.7 million. In Table 2 relevant fislancial data are presented in a manner (1) to reveal the financial gap between total payments and total current receipts (2) the extent of direct borrowing resorted to by goverrament t0 COver the fina. In Cial gap. From an economic standpoint of relating capital formation (ie. construction and maintenance of real assets) to budgetary outlays and for an assessment of government's fiscal policy it is necessary to adopt a different classification, so as to calculate the extents of capital expenditures of government which have been financed through borrowings. Loan finance of real capital formation (as against acquisition of financial assets) adds to productive capacity and helps to self liquidate the
EconoMIC REVIEW, SEPTEMBER 1981

Page 7
debt incurred for financing it. In Table 3 (a) the contributions of current account Surplus as available for financing capital expenditures and (b) the extent Of net domestic bOrrowing utilised to finance capital expenditures are brought Out.
A striking feature brought out in the calculations has been the very Small contribution made by way of
current account surplus in recent years towards financing capital expenditure and the COnCOImitant
heavy reliance on direct borrowing for this purpose. It is also a reflection of the general reluctance to use the tax system to mobilise reᏙᎾᏑᎥᎿᏗᎾ.
"iThe corollary Of this fact is that the government has increaSingly relied upon public borrowings as Well as foreign finance, including grants of capital transfers, for meeting capital expenditures. It is also observed that On occasions government has borrowed in excess of its requirements for capital expenditure with a view to adding to its cash balances. In the financial years 1970-71, 1971-72, 1979 and more cecently in 1981 there had been deficits even in the current account, which required the government 0 borrow for meeting these deficits. Note in contrast the performance in 1955-56, 1956-57 and 1957-58. Budgeting in these three years had permitted Substantial current account Surpluses to be realised so as to reduce very considerably the dependence on public borrowings. It is apparent that the trend at present is to depend increasingly on public borrowings to finance capital GXpenditureS.
Most developing economies are faced with the problem of enlarging the public sector and transferring resources for economic growth. Sri Lanka is no exception. Public borrowing hias become a necessary inStrument for Such reSOurce tran SferS. It is politically more acceptable than taxation. The economic effects of borrowing on the general price level and on product growth are much the same in a poor developing country
in So far as economic effects are broadly concerned. Taxation ΟΙ deficit financing which helps to keep the general price level high and rising affect the masses ad
versely and painfully until such time as output growth is evident. Even then the extent of the amelioration
would depend on the composition of output flowing from the illvestments undertaken. The importance of public borrowing and
management of public debt in the tasks of resource mobilisation can be shown in three important respects.
Firstly, there is the inescapable fact that government must borrow
ECONOMIC REVIEW, SEPTEMBER 1981
in order to ensure resources for imp velopment program is no specific ecC nual (budgetary) c aIfᎾ usually pr period of years all UndS tO finance til ruption places. On heavy responsibilit
Secondly, a go public borrowings influence the liquid and thereby the Stability. Most averse to permitti flationary expecta increases to contin iiag same as inf. reductions in incor incomes are mot S compensatory revi inflation invariabl wage-price Spirals " wish to avoid de extent to which t economy is affecte through public bo) from whom and v government bOrroW d term structure eC.
The liquidity
greater Or Weaker whether governmei the banking syste) and Whether Such securities of very , high in earness to dated StOck. FOI e of financial resourc the banking system able but it may : pose problems of der as regards lidt expectations and 1 Qne of the proble faces in resorting ing is that Of St.I between these e ing policies to mit. ΘΙΩ CΘS,
Thirdly, gove. upOn to issues se avenues Of in Westm rank safety of pr tainty of interest riding COnSidera section of financi: large and active S. ΟΥ1θ Of the obje ernment endeaVO is a recognified ernment haS tO bOI lic to Supolement its financial oblig ernment COuld ul, taxation and rai through profits of its reliance on pul rowings can be red to deficit financing ses can be signific pressed differently targets are set in availability of resO

adequacy of fiscal ementing its deme. Even if there nomic plan, anapital expenditures }grammed Over a. d the search for ese Without interthe government a 7.
'ernment through S in a position to ity of the economy state of monetary
Overnments are ng a state of intions and price
ue Without checkation results in les Of thOSe WhOSe ubject to price Sions. Cost push y sets in motion which governments aling with. The he liquidity of the di and influenced rowings depends which Sectors the S and the nature of Securities offer
effect Will be depending upOn ht borrowing from in is more Or leSS borrowing is on Short term With a money or long insuring adequacy es borrowing from h may be unavoidat the same time a different Orlidity, inflationary monetary stability. 'ms a government to public borrowiking a balance ffects and adoptgate the consequi
inment is called urities to provide ent for hOS e WhO incipal and cer
in COIme aS OWeriOns in the Sel1 investment.S. A 2curity market is ctives which govurs to foster. It 'act that a govrow from the pubresources to meet
ations. If a gove the means of Se larger SumS
public enterprise blic debt and boruced and recourSe for fiscal purpountly reduced. Ex
if expenditure
conformity to urces from taxa
tion and profit transfers, the growth of public debt can be minimised. Such a course of action is not possible as the rate of growth of expenditure tends to outrun the rate of growth of income and profits siphoned to the government. The figures in Table 4 in this respect, inderline very firmly that in al increasing trend growth of total payments the contribution made by taxes in absolute terms in recent years has shown Only a modest increase and that too of a relatively small order. Between 1977 and 1980 while current payments increased by 224 percent the relative increase in total taxes was 127 percent with the reSUlt tillat the Share Of tax COvering total payments fell from 62.51% tu 43.83%, the lowest registered for the span of years examined. Direct borrowings have been resorted to as the tax effort has not been sufficiently large enough to fully meet total payments. While taxes and total borrowings together have shown upWard movements, taking the period 1955/56 to 1980 as a whole it is seen, that the percentage of borrowings utilised to cover total payments has been On the increase, baring 1973 and 1974 and this underlines the reto raise taxes to levels high enough to contain or reduce dependence On public borrowing.
While the growth of public debt can be traced to the magnitude Of the budgetary gap and the character of budgetary policy followed all inf Which are Subsumed under the heading of "fiscal policy', the form of
financing resorted to, the type of securities issued. The rates Of interest Offerec and the
term structure of Securities made available to the investing public for subscription are relevant for appraisal of Government policy and fall within the scope of monetary policy. The mhOVementS and characters of theSe in StrumentS have a direct bearing on the level of liquidity of the economy. The scope of public debt and its influence, therefore, extends from fiscal policy at One end to monetary policy at the other and the area of influence of public debt management on economic matters is therefore unusually wide. It is pertinent to sort out for policy formulation those aspects of public debt policy which are infact measures Originating from government per se and those of which are generally Within the COntrol of the Central Bank. In all, these measures (1) influence the size. composition and distribution of public debt, (2) alter the level and term structure of interest rates, Supply of money and liquidity of the economy, (3) determine the timing, mode of borrowing, refinancing and conversion operations and (4) influence the volume and extent of trading in marketable securities.
5

Page 8
Sri Lanka's public debt, as cemarked earlier, has shown a Steep and spectacular increase. It is clearly USefül to Single Out the more important characteristics of the present debt position before discussing the necessity, if any, for making changes therein. The term public debt in this paper refers to the domestic and foreign borrowings of the government of Sri Lanka only,
excluding therefrom the debt of semi-government institutions such as debt of public corporations and
local authorities. Likewise external suppliers' and acceptance credits, Central Bank borrowings from foreign gOvergents and lenders abroad are excluded from foreign debt cover
ge.
- At the end of December 1980, the gross public debt stood at Rs. 51,655.6 million having recorded an increase of Rs. 16,180.9 million (45.1%) over the previous year. Of the gross public debt Outstanding in 1980 RS. 29.378.8 million (56.9%) comprised domestic rupee debt while the balance 43.1% or Rs. 22,276.8 hilliOñ. rupees was foreign borrowings. The more important trends of public debt growth distinguishing between gross and net debt and foreign and domestic components in this debt are given in Table 5.
during the last four financial years, i.e. since 1977 there has been a steady increase in the foreign debt component of public debt. In 196763 grOSS foreign debt accounted for 1.7%, in 1974 24% and by 1980 the Share had inCreased to 43% Of total gross public debt. While the abSOlute increase in domestic debt has been i narked portionately the increase in foreign debt has been higher. This higher trend rate of growth of foreign debt is explained largely in terms of inCrea Sed dependence On external aSsistance in financing imports of government Sources, the high import content of capital expenditures and more generally the acute foreign exchange resource gap facing the govestament.
The increaSes recorded in fOreign debt in recent years have to be interpreted with certain reservations of a technical nature. Consequent to the linking of the Sri Lanka Rupee with the Pound Sterling on first October 1972, the parity rates between the Sri Lanka Rupee and foreign currencies were revised from time to time by the Central Bank of CeyΟ Ιη. As the Pound Sterling WaS allowed to float against other currencies, the Rupee equivalent of foreign debt denominated in foreign currencies other than in Sterling was re-calculated with parity changes. Some order of the change involved is worthy of note. Such revaluation of debt resulted in an increase of R.S. 200 million and a decrease of Rs. 39 million in Sri Lanka's foreign liabi
6
in recent yearS. pro
lities in 1973 and The devaluation O Rupee in Novembe floating of the ru increased the rupe GrOSS and Net fOr
ere are cert &ideratiOnS COncer of foreign debt wil Stiessed. The i: debt, prin2rily re dependence of pub diture on foreign One hand and the lity to expand exp factorily on the ot the difficulties bro verse terms of tr; servicing problems shrinkage of expo would appear that tory way of Se
ent of foreigít through the creati ses. Unlike a íHternaly, the grow raised an entirely problemS.
The creation, , sequent retirement involves basically Sgt:ÉCes (real and YላWŠ õ፲ጌ private an These transfers co effects which may unde certain Ci nevertheless are Within the framew fluenced by the C a foreign debt is penditure is finan! sorces there is in resources from tih to the public Secto enables goods and debtor country to there is a Supple reSOurceS. In effe( enabled to increas plies all round wit cirrent costs and Sailor of foreigr creates obligations Servicing. "The ser
ment of foreign way of external r reoires the Creati pluses or savings It is possible to extent new foreig to reray previous but this exercise Over an in definite tirynę WOC Conę
has to be - Service rency.
The pertinent lüating the utilisat are to bear in mi. tivity of investme foreign borrowing ther the export S veloped fast enoug in the COntext of cy suited for this realisation of exp experience of mos

1974 respectively. if the Sri Lanka *r 1977 and the pee has no doubt :e equivalent of
eign debt. ain economic conning the growth
hich require to be increase in foreign flects the heavy )lic sector expenexchange on the COuntry's inabiOrt earnings satisher. Leaving aside ught about by adade and the debt resulting from a 验协 earnings, it the only satisfac'vicing the repay
obligations is lon of export surrupee debt held 7th of foreign debt different set of
servicing and sub
t Of rupee debt a tranSfer Of remonetary) bet
d public sectors. uld have monetary
7 be inflationary rcumstances, but manageable and
Ork Of policies in2ntral Bank. When incurred and exCed from Such reO transfer of real e private Sector ). The transaction Services in the be increased and mentation of real st the country is e the flow of suph the minimum of hardships. Utilidebt, however, of repayment and vicing and repaylebt has to be by esources and this On of export Surof import outlays. (tilise to a limited in exchange loans, 7 contracted debt, annot be carried period of time. A when foreign debt d in foreign cur
issues when evaion of foreign debt ld (1) the produchts finalImced frOm S and (2) Wheector is being deand large enough a commercial poli
purpose for the irt Surpluses The developing coun
tries is that foreign loans have been utilised (a) for consumption purposes, (b) for infrastructure outlays and, (c) for the creation of or expansion of industries producing import substitutes. While such investment activities, in general can produce the beneficial effects of making available a wide variety of goods than would otherwise have been possible, infuse and spread technical know how and skills and also provide new opportunities for investment, the impact of all Such activities on the export Sector unless the activities financed are directly export biased, the creation of export surplises would be small. Besides, the buoyancy of the domestic market ari Sing from a general Stimulation of investment activity has been to stimulate domestic sales in preference to exports. The sales of goods at home enable quick ፲re– turns and an easing of liquidity and traders opt in Such instances to direct sales to domestic sourceş thus reducing the chances of realising exfort Surplises. Resides there has been a noticeable failure on the part of Governments to impose a lien on export earnings or import expenditures saved through domestic Substitution programmes for serviciing, a nortization and repayment of foreign debt contracted. Resultantly, foreign financing does not except in theory generate export surpluses in the absence of some export control and regimentation.
Sri Lanka's increase in foreign debt and the servicing obligations are problems common to other developing countries pursuing policies of structural transformation and accelerated economic growth.
A World Bank study on External Debt (EC 167/74) commented that between 1967 and 1972 the debt outstanding of developing countries increased at a rate of 14.6% per annum and that there had been a hardening in lending terms and conseduent increase in the future debt servicing obligations of developing countries. The report Stated “A number of countries had reached the point during the late 1960s and 1970s where they were unable to continue meeting their debt servicing obligations as originally scheduled and had to arrange for debt relief...Countries ............... face the problem of adiusting to sharply adverse move
inents in their terms of trade.
“The problem may be more difficult for countries whose exports are largely composed of primary comMOditieS . . . . . 2nd this adjustment will be particularly hard for countries
with very low income levels'. In a more recent pubilication EC 167/80 the World Bank commented that
total medium and long term debt outstanding of the developing countries rose by 16% during 1979. Though
ECONOMIC REVIEW, SEPTEMBER 1981

Page 9
higher than the rate 14.6% ίθferred to the performance in 1979 revealis a significantly improved posi
tion from the average annual rate of growth of 23% in 1974-78. Siri
La Inka’s relative p0Sition in the "Debt, league' is seen in the figures given in Table 13.
he increase in domestic debt in absolute terms has been quite substantial in recent years. The composition of donestic debt and its changes during the period 1968-69 to 1974 aid 1977-1985) are Summarised in Ta ole 6.
Borrowings effected through the issue of rupee loans, paring the exgel'i elince in 1980 İlave accounted íor 95% of the increase in total di Omlestic debt. In the computation oi diO II estic Ciebt since 1919 relative Siares of the Several items showed a i.ear constancy with rupee loan Stock accounting for 70-74%. Treasury Bills next in impOrtance Overaged 24%, Central Bank advances 5% and Tax iteserve Certificates 1%. The fiScal events of 1979 and 1980 disrupt this long Standing pattern and were the
Outcoine of Special circumstances which necessitated the Government
increasing its reliance on Treasury Bills as a means of budgetary financing. When compared with the fiScal performance of 1960s, the fiscal aid debt nanagement policy follOWed up to 1978 reveals that the govetniilent was averse to an increase Of the level of Treasury Bills outstanding and to use theSe as the primcipal means in financing budgetary deficits. It is an indication Of in axicial restrain and a desire to contain the magnitude of inflationary financing. In fact a clasification of public debt outstanding into two classes “floating debt' and “funded debt', the former comprising Treasury Bills, Tax Reserve Certificates, Central Bark advances and National Sevelopment Bonds and latter including Rupee Loan Stock would reveal that the share of floating debt (consisting mainly Of Treasury Bills) in 1975 decreased to 30%, the lowest proportion recorded Since i959-60. The heavy and unusual cecourse to TreaSury bill financing both in 1979 and 1980 Should be seen in the light of the severe resource constraint faced by GOVernment. In 1980 in particular, the Sri Lanka economy was subject to very heavy pressures in the task of aggregate demand management. The economic policy pursued by the Government was basically a “big push' within the general framework of an open and liberalised economy. The public sector investment projects particularly the four lead projects gained momentum in 1980 and demanded a higher share of resources than previously planned. As the growth of resources (revenue) lagged seriously behind the growth
Ecoxonic REVIEW, SEPTEMBER 1981
of expenditure an money market in vate SectOr to cla large share of the government S ii) a resource C( proportions Was le bit to resort to b; ani un precedented irgin the Central in the form of TreaSury bill S. TI economy of Gov tionary delfieit raise money supply level of aggregate C RiOnly. 1flatiOnar i230 was the pri. the preSSure on th IlhheimtS , a,ind the sha,: rent account defici e:i'a, kole and precipi the country's ext{ pite the vastly in C fiÜWS.
Heavy and coatint borrowings from through the issue Stock has been th the increasing sha dekot in the total oj It is useful to pc. arising Sector is ign SuGScribing Loan Stock and Rupee Loan Stock Sources which are tutions and persons ing Sector. A signifi a Dié in antinual Sub Rupee Loan Stock : of the captive sect SOLice of investible analgamation. Of Savings Bank and ings Bank and th Government Saving Savings Bank toget ployee's Provident Joint, investment F sinking funds) thes ders have emerged Subscribers to Rup
The Share of t in the total of loa aggregated 83.4% W tions of the InSurg are added the sha Sector in 1974 Stoc In 1980, 97 per cen ing rupee securitie; Oh Bank SectOr. cribed by Private Sion Funds in bol the captive instit the near entirety iSSues. AS in the p& Sinking Fund, the Bank and the Em Fund continued to subscribers to Rupe« cess of a governme: has become in these creasingly depende
 

i events in the
lucing the priequally nobilised savings, eriously trapped
instraint of major ft. With no choice nk borrowing On Scale particularly Bank. These came resh issues Of he effect on the ernisme (htS infkafinancing Was to and to Swell the emand in the eCOy borrowing in Cipal reason for e balance of payply expanded curt caused a considtOuS decline in rnal reSSYves deSreased Capital in
led reliance ΟΙΩ non-bank sources Of Rugee Loan e Ilain reason for ife Of the funded debt outstanding. bint out that the now discouraged directly to Rupee Subscriptions to are mainly from classified as instiin the non-banklcant trend noticeScriptions to the is the en largement Or as the main funds. With the the Post Office the Ceylon Save centralisation Of gs in the National her with the EmiFund and the Jind (On behalf Of e institutional llenas the principal e Oan StOck.
hese three sources nS floated in 1974 Then the Subscrip,ᏂCᎾ Corporation re. Of the captive d as high as 95%. t of the Outstandwere held by the Baring 1.1% Subs"rovident and Penh 1979 and 1980, tiOnS COntributed of rupee Securityst the Public Debt National Savings ployees Provident be the principal Stock. The Sucit loan programme circumstances inht on the availa
bility of funds in these captive sourceS. The grOWing importance Of the captive sector is seen in Table 7.
In examining these statistics it is inaportant to bear in mind that an important function of the Central Bank is to obtain as wide a distribution of marketable debt as pqssible. It would appear that given dependence on the captive sector, the narrowness of the securities market has been a handicap in stepping up borrowings.
In fact the differential rates Of interest on National Savings Bank Operations of borrowing from the
public at 20% and 22% p.a. and investing in Government Stock at 16% on the One hand and the tax exempted interest on the funds of Subscribers of 1/3 the assessable inCore or R.S. 2,500/- whichever is higher have been factors discouraging investors from selecting Government stock inspite of the reduced iniaturity period of stock from 10-12 years to 3 years and enhanced rates Of interest.
The mechanism of Sinking Funds for redemption of rupee debt affords Sorine relief for repayment yet there haS been the budgetary problem Of firiding Sufficient funds in current re ceipts to pay for the Servicing of domestic debt. Serviciing cost of donestic debt has always been regarded as a charge on current receipts. Theoretically there is no objection tO financing interest charges from new loans floated. Yet, very few governments have resorted to this practice. It is the growing burden of interest charges which is the mainspring of apprehension over domestic debt growth. Two points require to be underlined in this connection. Firstly, iising interest costs reduce the current account surplus and thereby reduces the vOlume Cof Current receipt:S available for capital formation. Secondly, interest payments are in effect transfer payments and would necessitate taxation to cover payneights. The redistribution of income which results is not without economic di Sincentives. Noir is it certain that the recipients would invest in Government Stock in view of the poor marketability of the securities.
The servicing costs of Sri Lanka's Domestic Debt has been calculated for the period 1964/65 and 1980, selected years and these are given in
able 8.
There is one other aspect of the public debt growth which remains to be examined, namely the maturity distribution of domestic debt. Rupee loans floated since 1970/71 to July 1980 carried an interest rate of 9% and 10% for a maturity period of 10-12 years. In July 1980 the interest rate on government stock was raised to 16 per cent for a shorter maturity period of 3 years. Consequently the maturity pattern of domestic debt has shifted from the
7

Page 10
long term 20-25 years distribution group to the medium term 10-15 year distribution group and would in the current situation bunch in the short end of security listings. See Table 9 for a maturity distribution of domestic debt.
Changes in maturity structure have in portant consequence in debt management. Firstly, they alter the structure of interest rates and Secondiy refunding operations are made more or less difficult depending on whether the term structure of the debt is shortened or lengthened. The naturity structure of debt can be altered at the time of new floatations. The shorter the debt, the closer it gets to the condition of money - the primary liquid asset - and consequently makes budgetary provisions more inparative and immediate.
A government with a definite long terms investment programme is normally interested in lengthening debt because long dated Securities render it convenient to undetake investment projects with long gestation periods. A government Ca which are longer than the average lengthen debt by issuing maturities Weighted maturities of outstanding debt. Influences bearing on the saleability of longer dated stock are noted aS lenthening of debt involves a cost Which cannot be OverlOOked. Sri Lainkan experience of recent date is, in the light of the above observation, Somewhat at cross-purposes. While government lead projects and investment programmes are long gestated, the financing of these has been from short dated funded Stock and Securities of unfunded, very short maturities. This makes interest and amortization heavy charges on government's payments.
In an integrated, developed economy where markets are sensitive to economic impulses, decisions are readily transmitted between product and factor markets and where in particular, monetary and fiscal mea— sures are enforceable and have their desired effects, the structure of market rates of interest is determined by the supply and demand for securities in every sub market. The demand for securities and their transaction prices reflects market evaluation of maturity term, risk element and the liquidity attributes of each type of asset. Securities of shorter maturity, lower capital risk and which conseauently embody higher liquidity carry lower rates of interest while securities which have longer maturity periods to redemption and which are exposed to higher risk of capital loss in the event of interest rate changes carry higher interest to compensate for the drawbackS.
The relationships between various short term rate and the long term rate is a complex One. Money rates of interest paid for different loans
8
at the same date another for three Firstly, the rates O. cause of difference time for which Secondly, because the risk of defaul and thirdly because tall loss.
The relationshi interest rates and are explained in til Of interest. This other things being engaging in a long Fil:Self intO a mC than he WOuld b from making it. I is Offered for a people would pref “If Short frate:S ar change the l0ng ra Short rate by a nOl If the current shO. as abnormally low, be decidedly above can only exceed th current short rat abnormally high' & Capital p. 147) testing the logical theory which are be pointed out th for the United Ki: the ShOrt term rate ed the long rate air Whatever might b for this OutcOme, t ing. Between 1825 rate was above the months and in 58 rate was above t longest time for w) Was Without inter long rate Was 42 m Of more than 20 m frequent.
To bridge theC facts is often a di determining the ra able on governmen ty theory offers a guidance. In SO f; debt is concerned, rities are not eX default and theref tions which influ rate on governmen of capital 10SS Cal terest rates in the premium to be o with liquidity A ment has a built a longer dated St. nature Of the ir financed, a highe paid for inducing With their funds. payable on long
- Often been in COI
ment’s objective o as possible interes minimise the Serv The pursuit of a p rates artificially k disability that it m

differ from one main reaSOns. f interest vary bes in the length of Oans are to run. of differences in t by the borrower 2 of a risk of capi
p between various their maturities he liquidity theory theory maintains, g equal, a person term contract puts bre risky position e, if he refrained f InO eXtra reWard long lending most er tO lend ShOrt. e not expected to ate Will exceed the mal risk premium. rt rate is regarded the long rate will it; the Short rate he long rate if the 2 is regarded as (J. R. Hicks; Value While not cOnpremises of the valid it should at financial data ngdom reveal that has often exceedld for long periods. e the explanation he facts are strikand 1938, the long e Short rate in 764 0 months the Short he long rate. The hich the short rate uption above the nonths and periods Onths were not in
ry with observable fficult ta Sk. Yet in te of interest payt stock, the liquidipractical norm for ur as government
gOvernment SecuOSed to a risk of Ore the COnsideraence the coupOn t stock are (1) risk Lsed by higher infuture and (2) the ffered for parting lthough a govern
in preference for ck in view of the vestment projects r price has to be Subscribers to part he higher interest iated stock has flict with governkeeping as OW rates in Order t0. cing cost of debt. licy of low interest ept down has the akes more difficult
for the government to utilise debt management as a tool for maintaining monetary stability of the econoIY1y.
Some aspects of the theory of public debt should be considered to counter the notions of a “burden' in debt growth. The growth of public debt is generally viewed with concern and almost with disfavour. Anxiety over the increase of public debt stems from a comparison of public debt with private debt. Equation of public debt with private debt has often induced false reasoning. The analogy between individual or private debt and public debt is fallacious in essential respects. A government contracting debt domestically has also the privilege of creating the means of repayment of that debt. Besides any apprehension that government might not be in a position to repay debt is ill-founded. Repayment of past debts can be effected either through direct money creation (the issue of Treasury Bills to the Central Bank) or through the floatation of new loans. It is also possible, though not often resorted to, for a government to Service its debt, interest charges due on domestic debt through new loans. The Orivate individual contracting debt does not have the same means of repaying the debt.
There are three theOretical urnderpinnings on which current public debt theory is Supported. These may be listed as follows
(1) The analogy between individual or private debt is fallacious in all essential respectS.
The creation of public domestic debt does not involve any transfer of the primary real burden to future generations.
There is a sharp and important di Stinction betWeen an internal and external debt.
The necessity for drawing a firm distinction between private and public debt is seen with respect to production, employment and income effects of borrowing. The public sectoro (the government) as well as priwate Sector (individuals) both Strive to maximise their income. But this end can frequently be missed by the public economy, if it applies the financial principles appropriate for the private economy. To an individual it is important that his expenditure be kept below or within limits of his current disposable income. For the public economy how
(2)
(3)
ever, an increase of expenditures may frenuently increase total national income and improve the
fiscal position of the state. An individual is concerned exclusively with the effect of his action upon his Own business. The effect of his own economic activity upon other individuals is significant only in so far as
ECONOMIC REVIEW, SEPTEMBER 1981

Page 11
these have a bearing on his balance sheet. The balance sheet reveals to an individual all that is required to judge the appropriateness of different lines of business policy. In the case of public finance and public economy, however, it is quite otherwise. The Success or failure of public policy cannot be solely read from the balance sheet of the nation. The Success or failure of public policy can be determined only by noting the effect of expenditure, taxes and loans on the growth of national inCOme, the fuller use of factors of production and how the resulting national income is distributed.
Leaving aside the consideration of an actual use to which real reSources are put, also the social productivity and the time pattern of the flow. Of benefits from investments undertaken by the government out of borrowings, it can be stated that an act of government borrowing transfers current purchasing power from the private sector to itself. Monetary resources whether borrowed, obtained through taxes ΟΙ through an increase in money supply enable the government to bid for and employ real resources in the same general time period as that in which the borrowing operation occurs. Withere real resources are drawn from private employment, the full Opportunity cost, that is the real cost of public expenditure is held to be borne by individuals living in the initial or current time period. Depending on the gestation lags of investment undertaken, the flow of reali incOne takeS place in a future period with the result that the current generation is called upon to sacrifice present consumption for future growth.
The precise extent of reduction in consumption is governed by the time pattern of investment Outlays and the flow of services resulting therefrom. The financing of public expenditure by borrowing has close similarities to financing expenditure through taxation. In both instances the real burden of the Sacrifice in consumption is borne currently. The loan method of financing as COmpared to the tax method involves different effects on individuals living in time periods following that of debt creation. Debt issues leave future generations with a heritage of both claims and obligations. But these claims and obligations in an inter. nally held debt cannot constitute a burden to the community taken as a whole because they cancel each other. Future generations are no doubt obliged to pay sufficient taxes to Service the debt. But the revenues collected by way of taxes are returned to the same generation though perhaps not to the same parties in the form of interest payments. Taxes are levied on income flows Out Of an en
EconoMIC REVIEW, SEPTEMBER 1981
- ing has also
larged capital sto abstinence in th transfer Of inCOm munity by way o interest income t is tenable that t sacrifice of resour exercise, more SO
pen to be bond
The case agai be terms of higher private busineSS e. corollary that pu in more than on tive. To lend credi public debt has l three types; (a) (b) "passive' debt debt.
Dead Weight d incurred in COnSE diture which in n( productive power community. Thes neither an increa: a flow of utilitie men Surate with t. resources utilised The most conspic debt of the de that arising from Passive debt is expenditures whi utilities or enjoyr munity Such as pu olic parks and t turn a money incC increase the effic reSOUrCeS Or prO' and capital in a the initial use of 1
An active pub curred in conseque expenditures on g self-liquidating an directed to capita economic growth indirectly increase capacity of the CC the flow of goods enable the econo frate fa Ster than | was undertaken. public health, hou designed to raise til people while expe: capital formation Servation, improve tion of natural rest tO in Crease Overal step up the tempo tion.
The view that is "unproductive' W vestment is "produc sided One. Public private investmen utility Creating Ol ciency creating. like private invest dertaken will be both utility creati promoting. There is OutlayS tend concu income and employ
 

k created through paSt. As the Within the comtaxes is made aS bond holders, it Lere is no real es involved in this if tax payers hapolders as well.
list public borrowin expressed in productivity Of penditures and its plic investment is sense unproducoility to this thesis een classified intO dead weight' debt and (c) “active'
ebt is one which is quence of expenway increases the or potential of the 2 outlays yield e in revenues no S Which is COmhe amount of real in debt creation. Lous type of publiC ad weight kind is war expenditure. one incurred from ch while yielding ment to the COmlpublic buildings, he like, neither reme themselves mOr iency in use of iuctivity of labour manner to justify reSOurceS.
lic debt is one in inces af (a) capital projects which are d (b) expenditures 1 formation and which directly Or the productive mmunity, enhance and services and my to grow at a OefOfe borrowing Expenditures On sing, education are he efficiency of the nditures on direct and on the con ment and exploitajources are designed productivity and of capital forma
; public investment hile private intive' is a very oneinvestment just aS t may be merely * it may be effiPublic investment ment if wisely unutility creating Or ng and efficiency s another aspect of irrently to expand
"ment as well. This
public expenditudes namely that it is
in COme Creating aS Wel in that these is particularly so in the case of public investment activity undertaken in a period when economic activity is greatly reduced. Deficit financing through debt creation for purposes of income creation may be a permanent and necessary feature in the modern public economy. The size of the public debt is of relatively little concern from the standpoint of the public economy. What is material is the manner of deployment of reSources which government has absorped and that is the productivity OI investment, undertaken. The aSSetS created through (passive and active deot) match the value of the liaoility represented by the debt at any choSen point Of time. These Observations tend to show that the the notion of a burden of debt arising out of illuternal borrowing is misleading perhaps even a simplification. Whether in fact there is a burden depends upon the character of the expenditure for which is debt incurred and there should be justification for expenditures in terms of benefits i.e. (a) employment and income creating (b) utility creating (c) efficiency Creating Or Some combination of these. The character of investment expenditure undertaken will effect the Standard of living, the rate of growth Of national product and the income (Savings) available for repayment of de ht. The corollary of this conclusion is that a repayment of debt by gu vernmeist (i.e. reduction of public debt) should come by way of a higher real product and larger flows of goods and services for private use.
Where an external debt is created the classical idea of a burden imposed on the future generation is fully applicable. The primary real burden can be Shifted for Ward in time Since there need be no domeStic sacrifice of resources during the period of debt creation. The payment of interest represents a real burden When foreign debt is cOntracted because the domestic in COme stream is reduced by the necessity of transferring resources abroad. Current as well as future generations will find their incomes reduced by Such transfers unless investment undertaken has augmented the real product. Finally, when a foreign debt has to be repaid, domestic resources have to be transferred to foreignerS. Thus where foreign debt is contracted with extended grace period, the real burden of repayment is borne by future generation. Where there is no grace period the present generation too, is called upon to bear a part of the transfer burden. Where
government expenditures have been directed to unproductive channelS and Such expenditures are
financed through external debt creation, the growth of external public
9

Page 12
debt may be regarded as acts of financial irresponsibility resulting in a financing burden on current and future generations.
There is one last observation to be made in the theoretical underpinnings of public debt theory, namely, that borrowing is only one of the means through which a government secures monetary resources for abSOrbing real resources. Except in the case of anti-inflationary debt issues ίOY ηλΟΥιetary management public borrowing involves the transfer of real resources. Borrowing is therefore, an alternative to taxation. If a given ievel of public expenditure is to be financed this can be accomplished in three ways: (1) taxes (2) loans and (3) credit (currency) creation. It is necessary to examine the problem of financing national expenditures in terms of the Whole set of fiScal alternatives and the effects of debt creatiGn should be analysed in differential terms. If debt is not to be issued and borrowing is to be contained then taxes have to be increased, alternatively credit creation should take place or there should be 线 reduction in the level of public expenditures or a mix of these alterna tiyeS.
Of the securities offered in the donestic market, rupee loan Stock issues constitute the most important itern in value terms of the internal debt of the country. But the absorption of rupee loan stock by private individuals and non-captive sources has been most disappointing,
notwithstanding the higher rate of
return and lower maturity. In fact, there hardly exists a market for these securities out side the the captive sector. Support for government loan stock has come principally from funds arising in the captive sector. There are several explanations which can be advanced for the poor response from private individuals and non-government institutions.
Firstly, the yield differential between government loan stock and interest rates paid on financial investment offered by National Savings Bank, Commercial Banks, hire purchase companies, financial compainieS and other private sector financial institutions has tended to widen, with the latter group offering appreciably higher interest rates on borrowed funds. These higher rates of interest may have lured investible funds from the government securities market. With the recent legislation of registration of finance companies with the Central Bank and the Supervision of these operations by officials of the Bank Supervision Department, the investor could look forward to a more disciplined monetary structure. The risks of defaults being reduced the individual investor as well as the corporate investor would
10
patronise these in the government : Captive SOurces.
Secondly, govel
despite shorter mat latively “illiquid. ” T (Dept. of Public De to support the mi ready to prevent nents in market W, port investor confic an ediates only in re offered by small in
:à3ritable instituti( purchases at the are thus restricted have in general to kers. Besides there ing which takes pla YợalüatiiOIS. In Stituti the captive market to support new issu ChaSe Of StOck in t negligible. Thus sul faced without buye Selves “locked-in” v H}ientS.
Thirdly, the goverinent Securit gent outlet has g isecause of the inf. which has develope periods of stable or the general level C vestors show a pre: ties with a fixed ra inflationary conditi fereceS i Shift frO appreciating assets and real estate.
Fourthly, the government Securi investors could we of a divergence O! investors and the
net an itS finar The preference of iaas been till rece ter HMS Oans SQ that be directed to ir with long gestation the loan and the vestment can be s, long stocks are is: the loan to be rep turns from invest) above, a long te renders debt mar task. However, gi of increases in i the use of higher curb investment a tary demand, inve to tie up funds foi vestor preference : stock as (1) they liquid in the situat price increases (2) of short dated s more stable and (3 tall loss on short comparatively sma a conflict betwe financing terms at is willing to abso
 
 
 

stitutions, leaving Stock issues to
nment stock is Burities offered rehe Central Bank bt) though willing arket and as is disorderly movealue so as to suplence, nevertheless spect of securities vestors, trusts and DInS. Central Bank official valuation
and transactions go through brois very little tradCe even at market ional investors in are inclined Only ues and their purhe Open market is OScribers are often S and find thenwith their invest
attractiveness of ies a S Ŝ ŝ an investgreatly diminished lationary situation ed. It is during
falling prices (i.e. }f prices) that inference fQr Securite of return. Under ons investor prebonds to capital , equities, bullion
poor response for ities from private ll be the outcome f preferences of needs of governlcial commitments. government has ntly to float long funds raised may lvestiment projectS lags. The terms of returns from inynchronised where Sued as to enable aid from the rement. Besides the cm debt structure lagement as ea Sy ven expectations interest rates and interest rates to ctivity and mone— stors are reluctant r long periods. Inis for short dated prefer to be more ion of inflationary the market value tock is relatively ) the risk of capidated securities is 11. There is then en government's ld what the public 0.
Fifthly, it is conceivable that taxation and fiscal policy may have also restricted the expansion of the government securities market as a possible outlet for private sector funds. High taxation Of income is generally acknowledged to have enCOuraged widespread tax evasion. Those who have evaded taxes are not likely to deposit their earnings either in banks or in Securities which may be scrutinised by tax authorities. The popularity of Certificates of Deposits as a investment outlet for 3|ack Money is evidence which Suppoits this observation.
In the same context it should be mentiOned that rules and regulations for administering debt which ibear on the mode of payments of interest on government rupee stock, the requirements insisted as regards eild O'Sement of Securities before ownership of securities is transferred and the time lags that ensue between receipt of interest vouchers by stockholders and the actual receipt of interest, the streamling Which is necessary to develop and foster the kee)eSS Of investorS aS Subscribe'S to stock, may have militated against the development of a wider governrent securities market. Especially as these regulations have had the unt intended effect of reducing the marketability of these investments.
The borrowings of the government in any one year are determined primarily by budgetary requirements. The volume of debt contracted and the naturity pattern of debt issued, however, influence the state of lig Uidity in the money market, as well in a round about way, the supply of loan able funds. Thus, it is an important task of the Central Bank to advice government on the feasible announts of new loans to be floated and on the terms and timing of offering of these to the investing public. A loan programme has to take into account compulsory repayments falling due on maturity. If these repayments add up to a large amount, government may experience in the absence of Sinking Funds or ready Shscribers for conversion loans a temnorary difficulty in meeting oth the loan programme and raising of Sufficient Cash to seet cash conversions. A bunching of repayments (where conversion is not possible) coupled with a large domestic loan programme could bring about a temporary cash shortage. However, with captive markets to lend support and with repayment proceeds of maturing debts accruing to these sources sich temporary difficulties are unlikely impair confidence in gnvernment’s ability to repay. Besides through conversion operations (refunding) the extent of cash payments to be made can be minimised.
Nevertheless, to obviate even temporary difficulties of cash, the maturity pattern of debt should be
EconoMIC REVIEw, SEPTEMBER 1981

Page 13
SO arranged that as far as possible these would not hamper regular market borrowings. For purposes Of ascertaining the bunching of debt payments, a maturity distribution of debt has been presented in table 10.
The above frequency distribution reveals that the repayments are evenly distributed with amount falling due for payment of roughly equal amount, baring 1984. However, the adoption of short maturity for the current borrowing programme would tend to increase the nominal amounts in respect of what Sinking Funds have been provided. In effect the "conversion' which takes place by reinvestment of sinking fund monies announts to a postponement of the debt for a further term equivalent to the latest date of maturity.
A study of Sri Lanka's external debt growth should focus on the Balance. Of Payments effects of external stocks and the modes of adjustment. For a large number of countries the adjustment to oil prices was crucially painful. Governments of oil importing countries had not only t0 alim at balance Of payments adjustments but also to choose investment and production priorities so as to reduce the shocks Of loss Of growth.
The large and continuing 经X一 ternal payments deficits and the inadequacy of our external resources to finance them has necessitated the placing of heavy reliance on foreign credits to tide over difficulties. This mode of financial accommodation resulted in the mid seventies in external liabilities increasing very sharply and concomitantly registering an increase in the service payments on foreign debt. As will be shown, the position has improved markedly in more recent years especially since 1978.
Service payments on foreign debt which absorbed 22% (1970-73) currently absorb on average about 14 per cent of the country’s foreign exchange earnings in rupee terms as seen in the data given in Table ll.
The debt service ratio is the proportion of foreign exchange earnings on current account absored by external debt. A rising ratio indicates an increasing burden and a falling ratio signifies the opposite effect. Sri Lanka's debt ratio, shows an inprovement which is most welcome. The ratio has fallen from 23% in 1973 to 12.4% in 1980.
Economic REVEEw, SEPTEMBER • 1981
Both amorts payments have sl Seventies sharp in rate Of increaSe O is the outcome O level of borrowing increasing reliancé credits and Com: which carry highe There has been the period since 1 credits to institu The fall in the de both the result of ings and the grk short term accept do not figure in calculations.
International debt service ratio falls. Debt Servict on debt service act On contractual de try had defaulted be reflected in a than if contractug used. It is neces: that the debt Se an - incOmplete int try's debt Situ factors have a bea: ing capacity. AI stability and dive country's export s pects for future lopment efforts extent of import taken, the time p
try's debt, the exchange ζθSeIV drawing facilitie
worthy of note.
Noting these, to list countries lative performance servicing and th country in questic on an internation Table 12 show th record Of Sever, worked out in te external currency.
Sri Lanka’s di have been in gene: of India and Paki with a number C tries Of Similar si: utilisation, and ment, Sri Lanka” ratios were high seventies. Note t was . Only one ot had a debt servic Sri Lanka, namel 972 there were S debt ratios were Lanka. In 1978, t countries with Other. Words, reSO
 

tion and interest Own in the early 'reases. The higher f interest payment f : both the higher s effected and the Om ShOrt term mercial borrowings r borrowing rates. gradual shift in 977 from suppliers tional borrowings. bt service ration is higher export earneater recourse to ance credits which debt service ration
comparisons of s have many pitratios are based tually paid and not bt due. If a counon debt this would Ower debt ratiO all debt had been sary to point out "vice ratio is per se icator of a counlation. Many other ring on debt servicmong these the 2rsification of the tructure, the prosgrowth and deveundertaken, the substitution underrofile of the COunsize of foreign eS, compensatory S available arA
it is still possible according to rein respect of debt hereby place the )n (i.e. Sri Lanka) al Setting. Data in e debt servicing all countries, all rms of a COmmOn.
bbt servicing ratios ral, lower than that stan; yet compared If developing counze, natural resource economic develops debt servicing in the sixties and nat, in 1965 there her country which e ratio lower than у Malaysia. In ix countries whose
lower than Sri here were three lower ratios. In urces absorbed for
debt servicing have grown larger and the servicing cost has increased over time. It would be a relevant inference that Sri Lanka would be faced with problems of rescheduling her debt or Seeking debt relief unless present trends are maintained or there are compensatory increases in export earnings to bear higher debt incidence.
Maintaining current trends will not be an easy exercise because of the heavy investment programmes undertaken, the possible growth of short term debt in the event of delays in the receipt of official assistance and bank borrowings. These items have shown increases and because the repayment of principal follows very soon in the wake of the loan commitment there is limited scope for rescheduling except at a cost.
A containment of the growth in Sri Lanka's foreign debt service payment should begin by a reduced reliance on commercial borrowings. It is not necessary to interpret fully the data in Table 13 as the statistics are self explanatory. In the period 1969 to 1972, suppliers credits showed a steep increase and their servicing costs exceed the servicing costs of DAC loans even though in volume terms the loans from DAC group were nearly 4 times larger. Note also that repayment of principal on suppliers credit accounted for a disproportionately high share and nearly equalled the total of interest and repayment of principal on loans from DAC countries. Reliance on short term credit imposed a severe strain on the debt servicing obligations of the country. In the period 1977 to 1979 even following a much increased volume of borrowing, the weight of service - payments (principal and interest), in debt outstanding showed' a favourable downward trend. The latter result was principally due to the greatly reduced reliance on suppliers credit and the greatly increased dependence on international Organisations and DAC aSSiStanCe.
Although Sri Lanka had consClOllSly reduced her reliance on costly commercial credits, the burden of foreign debt financing of loans already disbursed is likely, in the future, to be a problem of some magnitude. With a view to quantifying same, estimated debt service payments on debt outstanding as at end of year 1960 is given for years
1981 to 1986. . ܓ
The burden Of external debt Servicing . . would apparently be most severe in the years 1985 and 1986 with
11

Page 14
1. Total Debt Service
2. Of which principal payment
3. Amount of Principal due to oficial lending
Source: E 167/80
payments totalling US$ 115.1 million and US$ 112.3 million respectively falling due. These figures would alter as more foreign debt is contracted and utilised and repayment obligations are increased. A growing foreign debt inescapably underlines the central proposition that foreign debt repayment should come from real resources and export surpluses.
The scope for rescheduling debt in the event of a catastrophic fall in export receipts or a totally unforseen adverse import programme is yet promising as the share of official borrowing is higher than that from private and commercial sources. However, the actual relief that would be forthcoming would depend on the nature of fiscal and monetary policies pursued in correcting the "manageable' items of the balance of payments deficit as well as creditor confidence on the structural adjustment package accepted by Sri Lanka. Whatever be the scenario, whether it is a high forecast or otherwise, the safest course when embarking upon a foreign debt financed programme of investment would be for the government COncerned to undertake additional domestic resource mobilisation, increase such efforts and constantly keep in review the size and scope of the investment programme. In such a context, donors too would Oe agreeable to offer concessional terms as well as be willing to reschedule debt.
Sri Lanka has a good claim on figures studied here to request from
lending countries more favourable terms for borrowing emphasising that as her economy's productive
capacity gets enhanced the servicing of past debts could be achieved without undue strain on domestic consumption and real incomes of the people. The present foreign debt servicing ratios are modest in relation to export earnings. A fall in the ratio is seen for 1980 on account of higher rupee earnings of exports. For the servicing problem to be manageable, continuing gains on the
12
Million US
1981, 1982 1983
94.2 95.5 102.1
60.1590 648
47.1 48.5 43.3
export i front will ha ed by more judicio borrowed. Better bo the plea of product ces and a higher re stemming from an economy will also h debt servicing ratio try.
The formidable Sri Lanka is that ( within the constra
TABLE 1 INDICAT
Total Net Public D.
PEROD
1. G.D.P.--
2. Total Net Public De
3. 2% 1 Weight of Deb
PERIOD II
1. G.D.P.
2. Total Net Public De 3. 2% 1 weight of Det
PERIOD 75 D
1. G.D.P. 25,6
2. Total Net
Public Debt 12,9. 3, 2%. 1 Weight
of Debt 5
Notes:
+ G.D.P. dat na 1970-71 re. to a 15 mor with the c
* 15 month
-- Provisiona
Source: Cent

S available for development financing and the chosen time horizon for re
1984 1985 1986 paying these benefits - the now 111.0 115.1 112.3 firmly committed accelerated and heavy capital intensive investment 75.9 83.1 83.5 programme begun in 1977. The sacri54.8 63.9 65.5 fices to be made to achieve the growth objectives - as planned within the confines Of the time hOrizOn chosen - are many and hard. Nor for ve to be buttress- that matter is the path of adjustus use of funds ment to achieve these goals clearly rrowing terms om defined or easily contoured. Among ive use of resour- the sacrifices, one should reckon even payment potential a possibly lowered prospect for emenlarged viable ployment and economic growth in the 醬 ¥ o short-medium term, if the mechanics ng the coun- of demand management necessitate a cutting back on the level of investchallenge before ment, because of a lack of foreign of maintaining - assistance or domestic fiscal and ints of resources monetary mismanagement and even
oRs OF PUBLIC DEBT GROWTH 1959-64, 1970-74 & 1975-80
ebt and Gross Domestic Product at Current Factor Cost Prices
Rs. Million.
1959 1960 1961 1962 1963 1964 Av.
5930 6331 6353 6549 6849 7326 6556 bt 1524.7 1912.8 2332.7 2688.9 3065.4 3436.0 2493.4
it ... 25.8 30.3 36.7 41.1 44.8 46.9 38.0
1970 1971 1972* 73 Dec. 74 Dec. Aw.
13,187 13,674 14,720 17.920 23,302 16,561.0 bt 7,236.8 8,108.0 9,448.3 10,280.8 11,026.9 9,220.2 t 54.9 59.3 64.257.4 47.3 55.7
c. '76 Dec. 77 Dec, '78 Dec, '79 Dec. 80 Dec.- Av
91 28,032 34,684 40,479 49,782 62,246 40,152
9.7 15,620.7 22,434.1 27,745.7 31,511.8 46,779.0 26,172.2
).4 55.7 64.7 68.5 63.3 75.2 65.2
are on a calendar year basis. Public Debt data for all years upto ate to financial year ending 30th September. Data for 1971-72 relate h period, October 1971 to December 1972. The fiscal year coincides lendar year with effect from 1973.
beriod.
al Bank of Ceylon (Annual Reports)
ECONOMIC - REVIEW, SEPTEMBER 1981

Page 15
labour unrest reacting to a continu- timely adjustment ing inflationary situation. Loss of in- not made to cu vestor confidence for whatever rea- conspicous consun Son and reduced international credit ing merchandise standing are also likely to arise if re-alignment of
TABLE 2 COMPARATIVE POSITION OF NET BORROWIN BUDGETARY OUTLAYS, FINANCIAL YEARS 1954-55 to 1958-5
1977 to 1981
Rs. Million
(1) (2) (3) Total 11 Total Gap 1-2 payment current
receipts
1954-55 aw 1,068.1 1,241.4 -- 173 1955-56 so 1,322.7 1,256.0 -66
1956-57 - 1,506.0 1,273.0 -233
1957-58 or - 1,553.3 1,312.4 240
1958-59 * 99 • .............................. 1783.2 1388.8 -384
1964-65 2,431.8 1,968.0 463ھی۔
1965-66 2,609.0 2011.1 -597
1966-67 o 2,824.6 2,179.7 -644
1967-68 o --- 3,152.6 2,404.1 .48 7ست
1968-69 O - O 3,578.1 2,752.0 -826
1969-70 - 3,915.1 2,924.8 990یه
1970-71 o 3,973.8 2,835.8 -1,138
1971-72 5,403.8 4,032.1 -1,371
1973 - 5,026.6 3,928.6 -1,098
1974 e 5,829.5 4,682.7 -1,146
1977 o 8.812.8 6,543.7 -2,269
1978 Aa. o o o 17,687.7 11,473.5 -6,214
1979 as a 20,339.3 12,474.7 -7,864
1980-- o o 28,532.3 13,914.7 -14,617
1981-- A R Y 26,226.7 15,322.8 -10,903
Notes -
11 Total payments include Current Payments (Purchase of
Transfers) Capital Payments (Acquisition, construct of real assets, Transfers and acquisition of financial assets account of operation.
2| Direct Borrowing includes borrowing from Central Bai
Private non-Banks, non market borrowings and Foreign grants and capital transfers from abroad.
-- Provisional.
-- Estimated.
Source: Central Bank of Ceylon. ECONOIC REVIEW, SEPrEMBER 1981 藤
 

S and sacrifices are rtail unwarranted, nption, the widenade deficits and a possibly ambitious
G IN FINANCING 9, 1964-65 to 1974 and
(4) (5) Direct 2, 4%3 borrow- Amt. ing covered
by direct borrow1ng
3. 35.1 (19.68)
190.3 284.9
O 1890 81.12
.9 344.8 143.13
.4 423. 10.07
.8 386.8 83.40
9 606.9 10.5
9 609.9 94.57
5 722.8 96.57
.1 656.9 79.52
.3 898.4 90.72
O 900.3 79.11
1,364.1 99.45
.0 882.6 80.38
8 743.7 64.85
.1 2,117.6 93.32
.2 5,281.6 85.00
.6 6,246.5 79.42
.6 12,224.1 83.63
9 10,230.0 93.82
goods and services plus ion and maintenance and Net payments on
nk, Commercial Banks, borrowings and excludes
and mis-matched investment priorities. To survive these strains, more attention would have to be given to a better use of externally borrowed funds, cutting down on waste and the gearing or matching of investments to time profiles of output responses which help to augment aggregate supply for better management.
The key elements in the exercise af meeting challenges and sacrifices would be to map out a medium term strategy consistent with the use of available and readily reckonable external borrowings, without endangering external stability. The alternative would be a painfully sharp currency devaluation to maintain relative export competitiveness.
An adjustment of public and corporate investment away from highly capital intensive programmes with built in high import content to favour quick gestating projects benefiting wider productive sectors (i.e. not merely trading banking and service sectors) would be opportune. So, too, would be the conscious development of fiscal and monetary intervention instruments and infrastructural institutional developments such as a stock exchange, a merchant banking network, variable reserve ratios for commercial banks and reasonable net advances to deposit liquidity ratios which would help to mobilise more effectively domestic resources Out of incremental incomes and Channel these to productive activity. Reinvestment activities financed from income absorption from the current income streams would enable investments to be financed from SOurces with a lower potential for monetary expansion as against direct credit creation. The Sacrifices On the One hand made from restraining present consumption and the lowered employment and income targets arising from a modest growth rate and slightly lower Waiting period and on the Other hand, a restrain in the use of foreign commercial borrowings by a careful husbanding of foreign resources which infringe less severely Or the servicing costs of loans would not be too costly a price to pay, when viewed against the alternatives of political choice open to the country and a jettisoning of current forward looking policies.
13

Page 16
TABLE 3 SOURCE OF FINANC FINANCIAL YEARS 1955-56 TC
1977 T
(1)
Capital 11 Expendi[uሆe
1955/56 - - - ... 430.9
1956-57 − − − 395.9
1957/58 - - - 498.6
1958/59 493.0
1959/60 495.7
1964/65 - - - 536.7
1965/66 596.7
1966/67 - - - 698.7
1967/68 789.2
1968/69 909.8
1969/70 . 883.1
1970/71 789.6
1971/72 1,140.2
1973 - - - 1,160.8
1974 - - - 1,244.9
1977 - - - - 2,193.8
1978 - - - 5,424.1
1979 7,729.4
1980十 11,757.1
1981 - - - - a 11,015.7
Notes:
t| Capital expenditure data given here jects but exclude current elements i
2. Current account surplus or deficit (
current payments.
31 The figures where these exceed 100
-- Provisional.
Source: Central Bank of Ceylon.
14
 

ING CAPITAL EXPENDITURE | 1959-60, 1964-65 TO 1974 AND
O 1981
Rs. Million
(2) (3) (4) (5)
Source of 2s Borro4y- Net (3十4)3川 finance ings domestic Total Current A/C abroad borrowing borrowSurplus f -- Grants & as % of ing as % Deficit (-) Capital capital of capital as % of transfers expen- expenTotal capital as % of diture diture expenditure. capital
expenditure
91.5 6.6 6.7 13.3
70.5 6.5 44.3 50.8
31.0 6.7 33.8 40.5
7.7 9.7 63.9 73.6
4.7 6.7 80.6 87.3
14.7 18.6 58.0 76.6
3.6 19.7 88.9 108.9
12.4 29.9 60.2 90.1
1.9 24.0 70.9 94.9
15.3 38.7 35.4 74.1 1.4 25.6 83.2 108.8
-32.2 29.3 90.8 120.1
一4.6 3. 95.0 126.1
12.8 3.8 65.3 79.1
8.6 30.4 49.6 80.0
一0.4 57.2 62.1 119.3
17.6 72.9 36.7 109.6
11.5 48.3 50.4 98.7
3.2 52.1 740 26.1
-1.0 68.4
24.492.8
include capital items in recurrent votes and pron capital votes and projects.
-) is the excess or shortfall of current receipts over
% are reflected as increases in cash balances.
ECONOMIC REVIEw, SEPTEMBER 1981

Page 17
TABLE 4 RELATIVE SHARES OF TA
PAYMENTS 1955/56 TO 1959/60,
(1) (2) Total Total раутетts taxes
11
1955/56 1,322.7 1,015. 1956/57 1,506.0 1,011. 1957/58 1,533.3 1,016. 1958/59 1,773.3 1,057. 1959/60 1,821.3 1,119. 1964/65 2,431.8 1,439. 1965/66 2,609.0 1,400. 1966/67 2,824.6 1,401. 1967/68 3,152.6 1,682. 1968/69 3,578.1 1981. 1969/70 3,915.1 2,260. 1970/71 3,973.8 2,276. 1971/72 5,403.3 3,284." 1973 5.026.6 3.309. 1974 5,829.5 4,020.
1977 8.812.8 5.508. 1978 17,687.7 10,382. 1979 20,339.3 11,154. 1980 28,532.3 12,506. 1981-- 26,226.7 13,785.
Notes:
11 Total taxes include personal taxes p duction and expenditure plus death food sales.
-- Provisional.
Source: Central Bank of Ceylon Ann
TABLE 5 TOTAL PUBLIC DEBT-1
1977 T.
1968/69 1969/70 As at end of Amount % Amount % Financial Year - R5. Mn. RS. Mn.
1. Gross Debt 6,888.5 100.0 7,873.2 100.0 1.1 Foreign 1,375.5 20.0 1,578.4 20.1 1.2 Domestic - 5,513.0 80.0 6,294.8 79.9
2. Net Debt (b) a 6,239.9 100.0 7,236.8 100.0 2.1 Foreign 1,337.3 21.4 1,550.9 21.4 2.2 Domestic 4,901.6 78.6 5,685.9 78.6
As at end of سمبر Financial Year l
1. - ross Debt 2 1.1 Foreign 1. t 1.2 Domestic 1.
2. Net Debt 2 2.1 Foreign 1 2.2 Domestic 1
Notes: (a) Excluding (i) National Housing and State Mortgage Bank under suppliers, credit and (iii) Promissory notes issued in
(b) Gross debt less sinking funds in respect of sterling and ru loans and hence net and gross foreign debt is the same.
Source: Central Bank of Ceylon Annual Reports.
EconoMIC REVIEW, SEPTEMBER 1981
 
 

KES AND BORROWING IN COVERING 964/65 ΤΟ 1974 & 1977 ΤΟ 1981
(3) Total Direct Borrowing
34.1 190.3 174.7 351.8 423.4
386.8 606.9 609.9 722.8 656.9 898.4 900.3 1,364.1 882.6 743.7
2,177.6 5,281.6 6,246.5 12,224.1 10,230.0
Rs. million
(4) (5) 2%. 1 3%. 1
Tax Borrowing share share
76.77 2.58 67.18 12.64 65.44 11.25 59.63 19.84 61.47 23.25
59.21 15.91 53.66 23.26 49.61 21.59 53.37 22.93 55.37 18.36 57.73 22.95 57.29 22.66 60.79 25.25 65.83 17.56 68.97 12.76
62.51 24.03 58.70 29.86 54.84 30.71 43.83 42.84 52.56 39.01
(6)
3%. 2
3.36 1881 17.18 33.27 37.82
26.86 43.35 43.52 42.96 33,15 39.75 39.55 41.53 26.67 18.50
38.44 50.87 56.00 97.74 74.21
lus taxes on corporate income plus taxes on produties plus other capital taxes minus profitsfrom
ual Report.
1968/69 TO 1974 (a) (Financial Years)
O 1980
1970/71 Amount % Rs. Mr.
8,782.8 100.0 1,800.1 20.5 6,982.2 79.5
8, 108.0 100.0 1,767.6 21.8 6,340.4 78.2
1977
mount % Rs. Mn. 5,985.9 100.0 0,593.5 42.4 4,392.4 57.6
2,434.1 100.0 0,593.5 47.2 1,840.6 52.8
1971/72
1972/73 Amount % Атоитt % RS. M. RS. Mn.
10,318.7 100.0 11,379.9 100.0 2,392.5 23.2 2,795.3 24.6 7,926.2 76.8 8,584.6 75.4
9,448.3 100.0 10,280.8 100.0 2,352.5 24.9 2,750.5 26.8 7,095.8 75.1 7,530.3 73.2
1978 1979 Amount % Amount % RS. M. . RS. Mn.
20,949.8 100.0 35,474.7 100.0 14,582.3 47.1 15,840.6 44.7 16,367.6 52.9 19,963.4 55.3
27,745.7 100.0 31,511.8 100.0 14,582.3 52.3 15,840.6 50.3 13,163.4 47.7 15,671.2 49.7
1974 Amount % RS. Mr.
12,380.1 100.0 2,973.7 24.0 9,406.4 76.0
11,026.9 100.0 2,921.5 26.5 8,105.4 73.5
1980 Amount % RS. M.
51,655.6 100.0 22.276.8 43. 29,378.8 56.9
46,779.0 100.0 22,276.8 47.6 24,502.2 52.4
debentures (ii) Debt on account of imports of government departments favour of international financial organisations).
bee loans. Commencing 1975 there is no liability on transfers of sterling
15

Page 18
TABLE 6 COMPOSITION OF DOMESTIC PUBLIC D
Rupee Loans - Gross Sinking
Funds
(a)
I Sept. 1969 3,409.1 611.4 1970 - KM 3,924.9 608.9 es 1971 4,511.9 642.2 II Dece. 1972mm ... 5,103.0 830.4 99 1973 - 5,812.2 1,054.3 99 1974 6,590.5 1,301.0 III. Dece. 1977 10,391.6 2,551.8 78 12,049.1 3,204.1 79 14,929.1 3,962.9 1 80 - - - 17,611.0 4,876.6 1 Change 1970/69 a 十515.8 - 2.5 Change 1971/70 - - - - 587.0 - 33.5 Change 1972/Dec. 71 Sept. 十391.3_士188.2 Change 1973 - +-708.8-------- +223.9۔ Change 1974 -- + 778.3 +246.7 Change 78 - 1,657.5 + 652.3 + Change 79 a + 2,880.0 --758.8 + Change 80 +2,681.9 + 913.7 +
(a) Representing the market value of investments held on behalf of sink
(b) Including special loans towards payment of membership subscriptic amounted to Rs. 98.5 million at the end of December 1974, the Cer loans exclude promissory notes issued in favour of international fin
Source: Central Bank of Ceylon.
TABLE 7 CLASSIFICATION OF SUBS
1968/69 1969/70
Armount Percen- Amount PercenRs. Mn. tage Rs. Mn. tage
Subscribers
1. Bank Sector 0.6 0.2 17.5 20.3 1.1 Commercial Banks 0.6 0.2 117.5 20.3 2. Non-Bank Sector 339.4 99.84617 79.7 2.1 Savings Inst. (b) 36.9 10,6156.1 26.9 - 2.2 Sinking Funds 111.8 32.9 83.0 14.3
2.3 Departmental & other
official funds 8.4 2.5 6.2 1.1 2.4 Employees' Prov. Fund. 101.3 29.8 97.9 16.9 2.5 Insurance Corp. e es 42.5 12.5 45.5 7.9 2.6 Private Prov. & Pensio
Funds - O 36.8 10.8 53.9 9.3 2.7 Insurance Corp. 0.6 0.2 16.1 2.8 2.8 Others Cos. KO P 0.2 0.1 0.6 0.1 2.9 Individuals Clubs &
Institutions old 1.5 0.4 2.5 0.4
3. Total - - - 340.0
10
37
100.0
(a) Referes to rupee loans only.
(b) With effect from 1st April 1972, the National Savings Bank has take
vings Bank and the Savings Certificates Fund. -
16

EBT AND CHANGES-1968/69 TO 1974 AND 1977-1980
Rs. million
Total Net Treasury Tax Central National Gross Net
Bills Reserve Bank Develop
Certi- Advances ment ficates Bonds & others ۔۔۔۔۔۔
2,797.7 1,750.0 24.5 329.3 0.1 5,513.0 4,901.6 3,316.0 1,950.0 45.4 3744 0.1 6,294.8 5,685.9 3,869.6 2.025.0 - 66.0 379. 0.2 6,982.6 6,340.4 4,273.0 2,325.0 78.0 419.6 0.2 7,926.2 7,095.3 4,757.9 2,250.0 66.1 456.1 0.2 8,584.6 7,530.4 5,289.5 2,250.0 67.9 497.9 37.9 9,444.2 8,143.2 7,839.8 2,500.0 40.6 617.4 842.8 14,392.4 11,840.6 8,845.0 2,635.0 29.5 955.5 698.5 16,367.5 13,163.4 0,966.2 3,000.0 28.0 1,136.5 540.6 19,634.1 15,671.2 2,734.4 9,800.0 12.5 1,627.6 327.7 29,378.8 24,502.2 +518.3,+200.0 十20.9 + 45.1 --781.8 - 784.3 于533.6 十75.0_十20.6 十5.1 十0.1 十68.8 十654.5 + 403.4 -+-300.0 + 12.0 - 40.1 - 943.6 +7554 士484.9 -75.0 -11.9 十36.5 --- 十6584_十4345 - 531.6 -1.8 十41.8 -0.1 +821.8 十575.1
十338.1。一144.3 十1975.1 十1322.8 11.1-س- = 1350 س+ = 1005.2 . - 2121.2 + 365.0 -1.5 + 181.0 --157.9 + 3266.6 -+-2507.8 8831.0-+ 9744.7 + 212.9-سس 491.1 -+ = 15.5--- : 6800.0 -+ 1768.2
ing funds (including supplementary Sinking funds).
ons to the IMF, the IBRD, the IDA and the ADB. Net of loans which
tral Bank advances increased by Rs. 39.1 million in 1974. These special ancial organisations.
CRIPTIONS TO RUPEE SECURITIES (a)
1970/71 1977 1979 1980
Amount Percen- Amount Percen- Amount Percen- (Provisional) Rs. Mn. tage Rs. Mn. tage Rs. Mn. tage Amount Percei
Rs. Mn. tage
12.7 1.9 ----- ܚܚ --- - 12.7 1.9 ܚ ro- OMN n on- om 668.1 98.1 1500.0 100.0 2950.0 100.0 2801.5 100.0 216.0 31.7 402.1 26.8 1128.7 38.3 918.1 32.8 1618 23.8 506.8 33.8 771.3 26.1 817.6 29.2
9.4 1.4 1.7 0.1 0.1 m 143.0 21.0 397.1 26.5 8359 284 900.7 32.1 . ܢ  ̄
60.8 8.9 120.3 8.0 182.5 6.1 135.5 4.8
62.1 9.1 700 4.7 31.5 1.1 29.6 1.1 6.3 0.9 0.3 Chrm -- 0.8 0.1 --- mmu Mmmmm
7.9 1.2 1.7 0.1 o o e ·
6809 1000 15000 1000 29500 1000 2801.5 1000
nover the assets and liabilities of the Post Office Savings Bank, Ceylon Sa
ECONOMIC REVIEW, SEPTE BER 1981

Page 19
TABLE 8 INTEREST ON DOMES
Tota
C፱//ጕ
expe
1964/65 1 1965/66 as 1. 1966/67 2 1970/71 - - - - 3. 1971/72 4. 1973 a 3 1978 10, 1979 11, 1980 13,
(Prov.)
Source: Central Bank of Ceylon.
TABLE 9
Financial Year
DOMESTIC DEBT-ANALYSIS BY MATURITY DIS 1978 TO 1980 (as a
60/61 61/62 62/63 63/64
1. Total Domestic Debt. Rs. M. 2234.0 2693.7 3030.2 3375. 2. Unfunded Debt" as % of Total 40.4 43.7 44.4 43. 3.1 Funded Debt as %. Total ... 59.6 56.3 55.6 56. 3.2 Below 5 Yrs. 9%. Total 11.6 10.1 8.1 6. 3.3 5-10 Yrs. %. Total 7.9 8.5 12.1 13. 3.4 10-15 Yrs. ?, Total - - - 9.8 6.7 7.4 6. 3.5 15-20 Yrs. 34. Total - 16.5 14.3 8.2 7. 3.6 20-25 Yrs. 4 Total 13.8 16.6 19.8 23.
Source: Annual Report of Central Bank
TABLE 10 MATURITY DISTRIBUTI
BASED ON COMPULSORY
(Position as at 31s
No. Year of
Maturity
1 1981 2 1982 3 1983 4. 1984 5 1985 6 1986 7 1987 8 1988 9 1989 10 1990 11 1991 12 1992 13 1993 14 1994 15 1995
Total
* Repaid on 1.2.1981
Source: Dept. of Public Debt
Central Bank of Ceylon.
TABLE 11 FOREIGN DEBT SERVICING RATIOS
1970 1971
1. Foreign debt service payments 453.4 491. a. Amortisation no e 353.7 387. b. Interest os 99.7 104. 2. Earnings on exports goods & services 2253.3 2244. 3. Debt service ratio 1:2 20.1 21.
Note: Values from 1971 onwards are affected by the Devaluation and su
ECONOMIC REVIEW, SEPTEMBER 1981

TIC DEBT 1964-1980-SRI LANKA
Rupees million.
l Interest ong Of which
2nt domestic interest on
nditure debt Rupee Loan 2%. 1
395.8 87.4 73.6 4.6 96.8 103.2 85.4 5.2 )96.7 118.4 100.1 5.6 D96.7 263.4 195.7 8.5 D84.8 401.0 309.5 9.8 790.6 392.8 3.19.1 10.4 521.5 1054.7- 839.0 10.0 588.0 1276.9 1028.7 11.0 535.2 1787.4 1330.3 13.2
CRIBUTION 1960/61 TO 1963/64, 1969/70 TO DEC. 73' AND
least date of maturity)
69/70 70/71 Dec. 72 Dec. 73 1978 1979 1980
TOV.j. 3 6294.8 6982.5 7926.2 8584.6 16,367.5 19,634.2 29,378.8 37.6 35.4 35.6 32.3 22.1 21.2 38.9 5 62.4 64.6 64. 67.7 77.9 78.8 61. 1. 7.8 5.7 5.4 5.0 6.4 8.1 13.4 2 6.1 1.1 3.9 13.9 35.7 35.6 26.3 4. 8.5 19.4 28.7 26.6 29.2 32.2 20.2 3. 16.6 16.0 17.2 17.9 2.3 0.2 --- 5 23.3 16.5 9. 4.3 ܚ مسيحسمسم ۔۔۔۔۔۔۔۔۔۔۔۔۔
ON OF RUPEE LOANS 1980-1995
DATE OF REPAYMENT it December, 1980)
No. of Total Amount Loans Repayable
O1 24,860,000 ܗܝ*
21 2,038,111,900 18 608,168,600 20 1,277,278,600 18 1,141,788,700 18 1,172,275,300 17 - 1,637,532.300 17 1,752,417.100 17 2,010,000.000 24 3,307,123,100 15 1,916,422.800 11 350,000,0000 11 340,000,000 O1 35,000,000
209 17,610,978,400
S SRI LANKA 1970-1973 AND 1977-1980
Rs. million ۔۔ 1972 1973 1977 1978 1979 1980
(Prov) 6 480.2 629.2 1211.9 2347.2 2383. 2762.蟹 1. 378.3 520.8 2966.9 1862.4 1627.4 1781.5 5 101.9 108.4 45.0 484.0 755.7 98量.3, 2 2205.9 2733.3 7563.2 15148.8 18274.7. 22208.O. 9 21.8 23.0 16.0 15.5 13.0 12.4
bsequent floating of the rupee.
17

Page 20
TABLE 12 INTERNATIONAL COMP,
965-67, 1970 (Debt Service as percentage of
- - - - - 1965 196 1. Sri Lanka - ... - - - - - 2 20 ٭۔ ۔ ۔ ۔. 2. India ve » o 15.0 21. 3. Pakistan . . . . 110 13. 4. Burma is a se: 4.6、李 5. Indonesia ... 10.3 8 6. Malaysia ess. . . . 1.3 7. Thailand * * * 3.7 3 8. Philippines 5.4 6 9. Tanzania 4.5 3. 10. Kenya . . . . ... 5.9 5
Source: World Bank: EC 167174 一、 EC 167180 Note:
(1) While data for periods 1965-1967 the Source is one and the same, til between these years as movement comparison is not possible becau compliation.
DEVELOPNG COUNTRIES (percentages)
..... 1970 1971, 197 indicators .ܒ Debt Ratio ... 8.9 9.2 9. Interest-service ratio 2.8 2.9 2. Capital-service ratioa 其4.5 14.5 ±3。
Debt/GNP (percentage)b 12.3 13. 13.
Debtsexports (percentage)b 80.1 85.2 81. Debt/reserves (percentage)b 263.7 239.9 183. Interest-services GNP క్రై
(percentage)b --- 0.4 0.4 0. Menno Item Total public debt outstanding
and disbursed, all included
contries (billion of
dollars) » K IX 50.459369
Note: Includes all developing countries that
tem except (1) the capital-surplus oil : and reliable time series data are not avai Comoros, Guinea, Iran, Iraq, Leban New Guinea, and South Africa). a. Contractual service payments on long-term divided by exports of goods and services b. Debt outstanding and disbursed. -
1969 1970 1971 1972 1976 1977 1978 1979
Note:
(1) D.
Source: 'World Development Repor
OF SUPPLIERS” CREDIT IN TOTA
TABLE 13 SRI LANKA EXTERNAL DEBT OUTST
: Debt Outstanding (Disbursed)
Total Share of: (b) Intern. (c) DAC
(a). Suppliers' Orgnzs. Govts.
Credit 苇
209.5 31.4 27.1 108.1 274.1 44.8 27.4 145.1 310.6 44.0 29.1 1684. 404.4 51.9 37.6 1979 695.0 115.2 106.3 472.8 779.5 71.3 132.8 574.8 1012.7 51.1 2210 740.3
1086.0 41.7 280.67634
AG countries include Australia, Austria. Belgium, Canad Portugal, Sweden, Switzerland, U.K., U.S.A. and New Zeala
(2) Disbursement represent drawings on loan commitments and
Source: World Bank: EC/167174 pp. 141-142
18
EC/167/80 pp. 160-161.

ARISON OF DEBT SERVICING RATIOS 72 AND 1977-79
the exports of goods & Services)
6 1967 1970 1971 1972 1977 1978 1979 8 3.4 9.7 11.3 14.3 14.5 9.2 6.5 9 248 22.5 24.7 24.1 || 9.6 - 9.9 na 0 17.2 24.2 34.0 25.0 13.7 12.4 12.2 664 16136 163 136 154 250 :4537.078 80 11423 134 4 230 2730 66.84,47 436 363 32.8 106 15839 47275 70 68 143 265 232 8 446,7749 57274 S0 S 0S0 S SiS0SS0SS S 0S0 S0S0S00S0S0S0SSSSSSKSSSS0SS0
7 and 1970-72 are directly comparable because he data for 1977-1979 should be compared only s showing orders of magnitude. A period-wise se of differences in sources and coverage of
OUTSTANDING DEBT 1970-79
1973 1974 1975 1976 1977 1978 1979
8.8 8.48.49.5 12.412.6
2
O .1
8 2.7 432 33354.248 4 13.4 11.1 11.9 11.5 12.9 15.5 15.0 5 6
8
2
13.1 1 13.9 15.5 17.0 18.3 17.8 70.0 59.6 72.1 75.6 79.6 86.6 78.3 153.9 143.5 193.9 2046 214.5 217.3 176.4
5 0.5 0.5 0.6 0.7070.91.1
3 84.8 105.5 128.4 159.1 198.9 251.7 294.4
report to the World Bank's debt-reporting sysexporters; and (2) countries, for which complete lable (Afghanistan, Bahrain, Botswana, Burundi, on, Lesotho, Liberia, Maldives, Nepal, Papua
debt, plus remitted profits on direct investment
t** 1981.**
ANDING (DISBURSED) AND RELATIVE GROWTH
L DEBT 1969-1972 & 1976-1979
million USS
nd.
Service Payments-Principal & Interest Total Suppliers' Intern. DAC | Principal Credit Orgnzs. Govts. repayment
Suppliers'
Credit
31.0 110 - 13.0 9.7 7.3 36.4 11.6 4.3 11.4 8.6 42.2 13.1 4.0 12.2 10.5 50.8 17.4 4.4 15.8 13.6 126.9 84.3 8.4 34.0 75.6 123.3 60.3 9.2 : 53.5 55.0 88.9 34.9 10.3 43.6 31.0 75.8 18.0 11.0 46.0 15.0
la, Denmark, France, Germany, Italy, Japan, the Netherlands, Norway,
are shown in the year in which the drawing tates place.
EconoMIC. REVIEW, SEPTEMBER 1981

Page 21
DEBTS-RELIEF AND INDI
banks since 1973 a
- A World Bank View
IġġEB BELLEF While most developing countries have been able to meet principal and interest payments on their external debt, some have been forced to seek det relief. The circumstanceS leading to debt renegotiations have varied, but most had some similar
basic features. These included balance-of-payments deterioration and excessively expansionary fiscal and
monetary policies over several years which were aggravated by short-term shocks-that is, shortfalls in exports or workers' remittances, sharp Worsening of terms of trade and national calamities. Some steps countries took to cope with these difficulties added to their problems. They borrowed at hardened terms. Private credit also sometimes had a detabilizing effect. For example, banks would lend when commodity prices were rising but would cut back when export eanings declined.
Debt relief has been arranged for a few countries through aid consortia; large sums have been involved and different aims pursued. Pakistan's public debt of $990 million was rescheduled in a series of agreements negotiated in aid consortia meetings from 1972 to 1974, and in 1981. India received $1.25 billion of debt relief between 1968 and 1976 (along with aid pledges and without interruptions to service payments) from the Aid Consortium, mainly to improve the quality of aid at a time when debtservice payments were constraining India's access to free foreign exchange resources. Turkey received massive debt relief through the OEEC in 1959 along with general economic assistance. -
For 13 other developing countries over the past 25 years, debt relief on official or officially guaranteed debt (loans from governments and insured commercial credits) has been arranged through the Paris Club - ad hoc meetings of representatives of the governments of creditor countries. In contrast with consortium meetings, the Paris Club has discussed only debt relief and not overall flows of foreign aid. - During the 1970s, loans from commercial banks have expanded rapidly, and debt relief has increasingly involved commercial banks. The restructing of commercial banking debts has taken place in parallel with Paris Club agreements for Peru (1978), Sudan (1980), Turkey (1979) and Zaire (1980). In addition, there have been substantial refinancings of debt to commercial banks without Paris Club involvement: Argentina (1976), Jamaica (1979), Nicaragua (1980) and the Philippines (1970). Debt restructuring agreements with commercial
EcoxoMIC REVIEw, SEPrinți::R 1931
lion of which Turke
}} gg,
Debt relief has nerally for periods ( - on the condition adoptS a stabili (usually one approv or a stand-by agree balance of paymnet payment of resched inally over 7 to 10 to 4 years' grace. I
rescheduled debts a the rate for new being rescheduled cCnceSSional tennS ( plus long repayment ed only to India (r. nesia (Where the debt was restructure (1974) and Pakistan Generally, debt relie: tended on previously The Paris Club debt relief provide f Structuring of exter when debtor coun liquidity problems. B continuing disagreer tor and creditor ico length of the consoli the terms of repay different points of vi purpose of debt rel countries' nposition i tive of debt relief countries recommel debt-service payme and so restore their Thus, a short consc considered appropria lief can be adjusted the country's changil pay. The debtor sc that When debit, dif Seated, short const compel them to seek relief and Short re lead — tO — a, — futUre - boLa vice obligations. The renegotiations should their future adjustm about crediworthin longer-term view.
The best way nal community to as: large debt and poor remains unresolved, relief as part of of foreign financing economic rogram.
Source: World D.
- 1981'.
DEBT NO. There are two of debt indicators: Those that try's capacity for ma foreign exchange. . used of these is the - interest and princ long-term debt divide goods and Services. seldom be easily in
 
 
 

TORS
mount to $5.1 bily accounts for $2.1
been extended geof 12 to 18months that the debtor ization program ed of by the IMF ment) to eliminate S difficulties. Reuled debts is noryears, including 3 interest charges On are typically set at loans of the type
Obt relief on low interest rates ) has been extendnoted abouve, Indoentire outstanding d in 1970), Ghana (1974 and 1981). f has not been exrescheduled debt. arrangements for or an orderly rena obligations tries have serious ut there has been ment betWeern debuntries over the dation period and ment, reflecting Lew regarding the ief. Most creditor is that the objeciS tO l helpo - debtor nce meeting their ints as Scheduled creditWOrthineSS. lidation period is te So that debt reto correspond to ng capacity to re:ountries point out iculties are deepolidation periods : continuing debt payment periods ching of debt-serby insist that debt take into account ent problems and ess should take a
for the internatiosist countries w1th export prospects but increasingly a viable package g to suport an
velopment Report
CATORS broad categories
1163ՏԱl:e a COԱnking payments in The most widely debt-Service ratio :ipal payments on d by exports of its meaning can (erpreted: SOne
countries have had little difficulty in managing their debt with a ratio of 40 percent or more, while others have had severe problems when debt-service payments were less than 10 persent of exportS.
The apparent paradox is explain
ed partly by how easily countries can borrow commercially. As long circumstances, the interest-service roll over principal repayments. In such management of an economy, they will as investors have confidence in the ratio-interest payments divided by exports of goods and services-may be a better indicator of the country's ability to make payments abroad, since it avoids the distorting effects caused by a bunching of repayments, prepayinents, or refinancing.
e Ti'hose that measure a country’s capacity to generate real resources (which can then be used to pay for imports and service debt). The ratio of interest payments to GNP is often used to illustrate the debt-Service burden on an economy’s productive Capacity.
Some indicators-the ratio of external debt to foreign exchange reserves, for example-combine features of both types of measure. But none of them are an adequate substitute for detailed country analysis... - In a period (like the 1970s) when debt is Substituting for equity capital a country's capital-service ratio-contractual service payments on long-term debt, plus remitted profits on direct investment divided by exports of goods and services--may be the best guide to a country's creditworthiness.
As the table shows, the various measures have not alawys moved in line with each other, although all indicate a clear deterioration since 1974. Weighted by individual countries' shares in total public debt (so that the effect of countries with growing exports but low indebtedness On the average ratios is minimized) both the debt-service and the capital-service ratios increase more sharply during the 1970s (see figure), reflecting the high and rising debt of those countries that are currently the major bOr}'OWerS. developing cuontries' debt-service and captiai-service ratics, 1970:79
ومہ خہ خحی
weighted by shares , in public debt -
*^ > مه“
محمحہ حسی - = -_جه
Ν
| 7_911ܬ݂ܐ
i
79 78 7ד 76 73
-74 2ך 72 !7 טW%7
- - - Capital-service ratio - - - Debt-service racio
1
9

Page 22
The Economy
Deteriorating terms of payment problems
The Worsening balance of trade situation continued into 1981, With the merchandise trade deficit widening; and by the end of the first half of this year the adverse balance amounted to RS. 9,034 million (SDR. 407 million), according to latest Customs data. This compares with a deficit of Rs. 7,629 million of (SDR 369 million) recorded for the Same period in 1980.
The terms of trade began to deteriorate sharply from 1979 and this adverse movement has continued since. It was a result of the sharp increase of import prices and volume, and the slow rate Of growth in the export sector, Specially the major exports. Thus, Sri Lanka's terms of trade or the purchasing power of its exports have declined by 28 percentage points in 1979, and 14 percentage points in 1980 and this trend has continued into 1981. The Central Bank shows that the terms of trade Which deteriorated from 100 in 1978 to 72 in 1979; reached 58 for the year 1980.
The Central Bank commenting on the 1980 Situation concluded that the terms Of trade effect On the merchandise trade deficit WOuld amount to more than 70 per cent of the total deficit
“A loss of real resources Of this magnitude is unbearable to any economy, more so to a developing economy, with an on-going development programme to which the cOuintry is committed, and rather sluggish export sector which cannot keep pace with the sharp expansion of the import sector. Even though the deterioration of the terms of trade has been common to other developing countries in the region, the impact appears to have been less severe than in the case of Sri Lanka'.
Further compounding the situation is the falling exchange rate of
the rupee.
Sri Lanka's gross external assets had as a result reached its lowest position since 1977. ACCOr
ding to provisional data, gross external assets in 1981 declined to RS. 5,837 million (SDR 270 million) by the end of July 1981. In 1979 it stood at a peak of its 9,679 million. The decline occurred despite a drawing of Rs. 803 Imillion under the IMF Extended Fund Facility. The assets of the Central Bank and of the COmmercial banks decreased by Rs. 439 million and Rs. 149 million, respectively. The level of gross external assets as at the end of the month was adequate
20
of trade and
tO finance a months' imports p
Balance of pa become necessary this year the Gov. reCOmmendation í Finance to appro commercial loan. dollar loan negot try Of Finance a miilion US dollars Bank Of America, dicated jointly w TOkyO and the II Asia.
According to
"This loan will
the balance of
Government budg Will have a matu yearS, a grace pe an interest rate O the LOndon Intel for the first six y OVer fOr the bala, loan has a comm
CENTRAL
cent per annum O. and a managemer Of the total loan of 600 US dollars are conditions for of expenses incurl the negotiation all loan up to a max dollars. OfferS W fOur bankS but te Chemical Bank w more advantage previously obtaine private capital má
The Sharp wo Of trade frОm th had a profound ed ment budget, On i balance Of Oa more, the inc rent account defi

palance
pproximately two rojected for 1981.
yment Support had and On August 5 2rnment agreed to a rom the Minister of je a US$ 75 million It was a Euroated by the Minisind Planning for 75 from the Chemical which is to be synith the Bank Of Indo-Suvez Bank of
the Official bulletin: be used to support payments and the set in 1981. The loan rity period of eight riod of five years f 5/8 per cent over -bank Offered rate ears and 3 per cent nce tWO years. The itment fee of ; per
paced the growth in available concessional aid and investment flows forcing Sri Lanka to-undertake com
mercial borrowing on a significant scale and, as pointed out, causing net reserves to decline for the first time Since 1975.
The Strong need for 'stabilization' measures has been stressed by the World Bank in its report to the Aid Group meeting earlier this year. An important element in this stabilization task, it said, was the Size of the current account deficit in the balance of payments, which had increased from 5% of GDP in 1978 to 19% of GDP in 1980. In One of its fore-casts the Bank indicated that in this situation the Government could easily find itself faced with a budget deficit amounting to 18% of GDP, requiring excessive borrowing from the Central Bank, and an external current account deficit of 21% of GDP, requiring a large drawdown in grOSS reserves and Substantial external bOrrowing On commercial terms.
The balance of payments preSsures resulting from this Situation could force the Government to take undesirable restrictive measures. Thus, if the stabilization effort were
BANK TRADE INDICES (1978-100) - EXPORTS
Price Index Tಖ್ಖls All Exports All Imports Trade
107 16 106 104 17 98 102 18 94 103 24 82 89 42 72 107 49 58 102 44 78 94 54 02 100 100 100 152 72 217 58
in undrawn balanceS ut fee of , per cent and an agency fee per annum. There the reimbursement 'ed by the banks in ld execution of the imum of 35,000 US ere received from rms offered by the ere the best and OuS than ternS id in Sri Lanka in arketS.”
sening in the terms e end of 1979 has fect on the governnflation and on the 7ments. Furtherrease in the Curcit greatly out
relaxed in 1982, the Bank cautions, Government's import liberalization policy would be threatened and economic management greatly complicated. In particular, it would be extremely difficult in 1983 and 1984 to reverse the greater momentum which would have developed in the government investment programme; the large imbalance on the trade account, which could lead to speculation against the exchange rate; and the acceleration of inflati Om, which would result from the required adjustments in the exchange rate and its second effects on wages and government spending. In addition, both foreign indebtedness and the debt service burden would rise, to the detriment of future development programmeS.
ECONOMIC REVIEW, SEPTEMBER 1981

Page 23
参见
FEATURES
DEBT AND DEVELOPMENT.
JUAN C SANCHEZ ARNAU
Sanchez AIImaն of France's Centre International du development (CID) maintains that a grave debt crisis is emerging in the Third World as a consequence of the recurring deficits in the balance of payments of most Third World countries, and which have So far been financed mainly through external borrowing. Those poor countries whose deficits have been met so far by the trans
fer of concessional resources could also be strongly vulnerable to the present recessionist trends. The
dramatic growth in the foreign debt
and political - C and effects their S.
Primiarily, the of increasing inde belief in and purSl lopment' model p. increases in the ( maSSive uSe Of foreign and capit strategy has led to dence and the n large segments of trim only another lopment, based on of endogenous, Cre:
of Third World countries threatens tive capacities, coul the very autonomy - both economic World out of this
PRESENT SITUATION AND is rather an expre
PROSPECTS
Much has been said and Written about Third World indebtness problems and much more will be in the future. Industrialized countries are showing clear Symptoms of generalized recession, and contrary to developments a few months ago, no optimism is now expressed about short and medium-term economic prospects. Recent OECD estimates, in the light of the latest increase in oil prices, are much more pessimistic than estimates made earlier this year. As in the past, industrialized countries will probably transfer much of the effects of this recession, or of its implicit costs of adjustment, to Third World countries. Greater protectionism, lower imports, export Subsidies, a drop in official financial flows, more or less disguised expulsion of immigrant Workers, will be amongst the measures bringing about this transfer. To these will be added the drop in some raw material prices due to the fall in demand.
The impact on the Third World will depend on the scale of the recession, and the time it will take industrialized countries, in particular the United States, to react, under the assumption that this is a more or less traditional cyclical crisis albeit aggravated by new elements, which can be escaped oy adopting traditional neo-classical economic remedies. If, however, as many suspect, the present recession
EconoMIC REVIEw, SEPTEMBER 1981
problems affecting the functioning of models Of the in ries, then the im Sion. On Third W. be greater and m Such circumstan problem Will be relevant, Since it obvious expression of many Third W risist an aggrav balance of payme) If the vulnera ternal payments : Third World coul emerged, this has Sub-product of the the international Orde: the high lev liquidity. Without the transnational the large compani trialized World W( absorbed most of Ces available in
larketS, which ar. used to finance t. indebtedlinesS. Hen paradoxes Of the the same recessic Third World coun resources derived : Or remittance Of t kers, is generating abling them to co escaping the risk lapse.
This paradox trap With few exi trialized countries limit this liquidity

if theSe: COuntrieS overeignty.
underlying cause
btedness is the lance of a “deveredicted on rapid 3NP through the capital - both al-absorbing. This o increased depenharginalisation of the population. To approach to devethe enhancement ative and producdi aiSSist the Third
debt trap.
ission of structural the very basis of present growth dustrialized countpact of the recesDrld countries Will hore prolonged. In ces, the “debt’. come particularly Will be the most of the incapacity "orld countries to ration Of their intS problems. bility of the exsituation of many intries has not yet been thanks to a 2 recession and Of monetary disel Of internatiOrnal Such a receSSion. companies and eS Of the induspuld have already the liquid resourWorld financial e at present being he Third World's Ce One Of the present situation: on depriving many tries of external from their exports ..heir migrant wor; the liquidity enintract debts, thus Of ecOnOmic col
can become a StS. If the industook measure to which for Ortho
dox economists is One of the main causes of the monetary disorders at the root of the present crisis, many countries resorting massively to indebtedness would be deprived of these resources, but continue to be faced with the other aspectS Of recession which have compelled them to contract new debts. And When there is a continuous series of increases in interest rates in industrialized countries and there are daily demands for a greater control on the issue of dollars and the activities of the Euro-market, is such a moment still far away?
nOre 03:SèS than One, indebtness may well have been a well-calculated risk, and even a considerable drop in international liquidity within the framework of generalized recession would permit more than one considerably indebted country to escape the risk of problems, and the present situation and future prospects differ greatly default.
However, reservations must also
be expressed on this possibility because there is not just 'al) indebtedness problem' but several
from One country to another. SIZE AND CHARACTERISTICS OF "THIRD WORLD INDEBTNESS
The statistics published by the OECD on public and private disbursed debt show that from 1970 to 1977 the external indebtneSS increased from 72.9 billion to 244.0 billion dollars, growing at an annual rate varying from 12% in 1972 to 25% in 1975.
Non-official loans have increased their share Of the total from 28.1% in 1969 to 41.1% in 1976, and this
share has certainly continued to increase since.
On the basis Of figures for the end of 1976, eleven Third
World countries accounted for 60% of total public and private debt. i.e. some 115 billion dollars of a total Of nearly 195 billion dollars.
While the debt problem is basically COncentrated ΟΥ) this ՔrՕնք Of COuntries. the Situation of many other Third World ountries must also be studied to determine the future development, of the problems.
On this basis, four types of situation could be considered. First, that of the two major debtors - Brazil and Mexico, with 25% of total Third World countries debt (25.9 billion and 21.7 billion dollars respectively at the end 1977). Their debt service ratio (debt service as percentage of expjorts) was in 1976
around 45% and 32%, on the basis of “World Financial Markets' data.
2.

Page 24
These countries' indebtneSS is grOWing a in di involves significant Rimounts of their fulltire external Te - ՏՇն է:CeS, coisideraioly jourdiening their present resources. But these are not exactly the countries which could present major problems in the short term. In the case of Mexico, because of its oil resources could enable it to meet debt service and in the Ca,Se of Brazil, if itS balance of payments problems worSened, its present CreditOTS would be well advised to avoid a collapse which could have repercussions on
the entire international banking
system.
The second type of debtor
country are countries like South
Korea, Philippines, Argentina, Chile, Peru and Yugslavia. Most of then have adopted economic policies of increasing integration with the interiational market and are strongly oriented to promoting exports of inanufacturers and semi-manufacturers. The debts of these countries will probably continue increasing So long as the present international liquidity situation prevails.
There will probably be exceptions, but in any case, this is a group of countries presenting many signs of external vulnerability with increasing indebtedness. Thus the diept Service ratijO Of SOE e Of - theSe countries is reaching high levels: 45% in Chile, 41% in Argentina, 28% in Peru (1976 data).
The third type of situation consists of the varied group of countries with fairly low per capita incomes, with an external debt essentially Originating in public loans, With debt Service ratios between 40 and 18 percent, whose external vulnerability arises from the lack of diversification of the economy, and low rates of growth. This group could include Pakistan, Egypt, Bolivia, Jamaica, Angola, Congo, Guina, Dominican Republic, Mauritania, Sudan, Togo, Bangladesh, Burma, and Sri Lanka. Several of these countries also have debts of COmmercial Orgin - either bank loans of suppliers' credits - with a significant share in their indebtedness.
According to the World Bank, countries with a per capita income Of between 161 and 300 dollars -- the category where the majority of this group of countries is included showed the highest increase in indebtedness during the 1970's - 25% a year between 1970 and 1976. Private bank loans multiplied by 30 growing at 75% a year. Debt service increased at 26%, while interest
22
payments incre 23.Ortizai i35 S. Sg. this group inight Serious payments
Finally, the countries is that have debt, but de degree, on grants countries to fin. importS. This gro African countries. pia, Often finanCe their curret def The vulnerability very great. Serious economic future c present recessional
HE CAUSES OF INDEBTEDNESS P
The question
how Such a large World countries C at SUch a high lev especially Wien.
|leaders realize tha debtedneSS has - beé "JSual ways of
areas of econon. even political inde
HÖWever Che debtedness of the becomes clear tha Circular mechani, numerQUS ViciOUS development. It is this problem has only limited attel. has been viewed quence of underc aS One of its Cau One of the pricipa underdevelopment Self.
In trying to g these questions, to situations should First, that corres ries totally lacki With limited Capa for Self-financing. extremely depende have been unable SO6 → CaSeS OI whether they had tive - to eScape nal indebtedness t tial imports to er Sumer level S.
The second, m relates to those cc debitedneSS iS StrO1 type or model of have chosen, or to
& For the di eXtenSiVe U1 CID (“L’ er necaniSneS" of course, r

ised faster than he countities in Side ; SOOs) encounter
difficulties. fourth group of which does not pends, to a major Of industrialized ance their basic up includes many Some, like Ethio
up to 100% of icit with grants. of the group is
COHCertil for Heir an be expressed if y trends Worsen.
雪疆瓯 ROCESS
OW arises as to number of third ould have arrived "el of indiebtedneSS, In OSt; Of their it historically, inin One of the most losing important lic autOnOrmy, Or pendence.
analysis the inThird World it At it is a cential SIΥ1 Within the circles of underastonishing that So far been given tion and that is Mill0I'E 8'S 3. COMISElevelopment than SeS Or ait lea St aS means by Which perpetuates it
give an answer to WO baSic typeS Of be distinguished. bonding to countng in resources, city or autonomy These countries, nt on foreign aid, - although in e Imay Wonder no Other alternafrom strong exterO maintain essenSure baSic COn
Οίθ OOIΥ1ΙΩΟΙΩ C3SΘ. untries whose ingly linked to the growth which they
the eCOnOmic and
3. 00:1S6
Social policy followed as quence of the adoption by the domi
nating groups of the ideology of development. This is the case that We Shall now analyse.
DEVELOPMENT AS DEOLOGY AND ITS CONSEQUENCES ON FNDEFTEDNESS.*
In the Third World “development has become an tergral part of the national ideology'. The Simpleniided idea that One Or tWO siiveyear pians making massive use of equipment Supplied by the industrialized countries can give a COuntry a chance of qickly "catchin up' with the industrialized countries has often been the corollary of Such an ideology. Bogus pseudo-scientific rathena, tical equations Of the growth of revenue, based on investment/production ratioS througlia capital coefficients, have lent additional legitimacy to the plans of Third World countries. These mechanistic calculations have been enriched by various more or less brilliant and Superficial theories, which are almost always designed to justify a Special drive for massive investments in the “modern' industrial Sector, which is Supposed to generate Spin-off effects which will greatly accelerate a Country’s progreSS.
The majority of these theories leave aside an important historica consideration, that practically no Country haS industrialized Or “developed' only with foreign technology, and much less by importing capital goods. Examples of exaggerated “Europenization” and “modernization' in the 19th century (Ottoman Empire, Egypt, Tunisia, Iran, certain Latin American countries) were nUrnierOUS buit in al ca Ses the final result, was financial bankruptcy and the strengthening of foreign presence in the administration of the countries, and even, n. Some cases, the loss of political independence.
Generally Speaking, the “development' theories based on this ideology have all helped set in motion a Scramble for investments intended to bring about modernizaton; these investmentS have thus led ta massive and abrupt imports Of production equipment frO abroad and have driven the Third World deep into the technological trade circuits run by the TNC, with
rafting of this section and the final conclusion of this paper, e has been made of a document prepared by G. Corm for
dettement des pays en voie de
development. Origines et
) within an IFDA project on “Debt and development'; but, esponsibility for the ideas expressed here is the author's.
EcoROMIC REVIEW, SEPTEMBER 1981

Page 25
| -
a final result -
the
deepest
in
debtedness process of modern his
tOry.
The enquiry into the origins of
the hiri World ler. LiS to
empa
Size tí le Sequence: process of acculturation - transfer of technology - a. historical point of view, the process of acculturation initially manifests itself in tine military sphere, where the overwhelming superiority of the indus
indebotedineSS.
trialized countries
S*IrOl
Since the
19th
century has obliged the Third World technology. It then spreads gradually to the other spheres of the life of a Society, and it is in this way that the aspiration to the model of consumption of the
to borrow Wester.
indiu Strialized generally accepted,
possible to satisfy the
countries
and it is
beCOmeS
InOit
demand Of
a model but through technological borrowing, usually taking the
Of the massive
a Índ
fOrnih
indiSCriminate
import of the products of technology, and not of a global and Sustaillied effort to acquire a command of technology. Whether they are military or whether they consist of capital equipment for the production of consumer goods, the equipment imported by the Third World
s is no sense a transfer of technology.
At most they consitute a transfer of
productive capacity,
the
eXKCeSSive
cost of which is apparent only over
a long period and
blocks the
Semination of progress locally, the egalitarian and profitable insertion of the country into the circuits
of international
rade.
disand
The real accumulation of Capital. Which enriches Society is that which ies in the capacity to produce productive capacity, and not in the expansion of the capacity to import
productive capacities
In this Sense the
1iieCh.a.niSmS
the “transfer of technology the indulStrialiZed CountrieS t0
countries of the
World, as
from abroad.
fO from the they
have been used in practice since the preci Sely thOSe Which help teh industrialized countries to develop even further
last century, are
technological
and father behind. tal is imported, created in the
far exceeds that in the
genuine
country; the
Capacity, Third World becomes more dependent and
the
while
HOre lags Whatever
their the and
farther
Capi
added value exporting country importing
spin-off
effects takes place in the country of Origin of the equipment and not in the receiving country.
On the basis of this ideology of
'development', a model
has
been
developed for an accelerated process
Econorific REVIEW, SEPTEEBER 1981
Of industrialization nal investments debtedness to ing Or generatiing né hypoiesis has be be finally possible capital inflows and abroad. In fact, roach has perfect the interestS Of companies, in fav ternational divisiO Suited to their glo It is evident it trializedi COGüÍt:file:S are CiOKIng tiner ko { new international (ii XL) in keepiliš lOglCal eWolUtili GER C apparatus and None eleSS We fee. attenpt to for in theory for the ful ili DL aS a minecznaniiS third World COUI cape, because the tine LDL i S the fa casinot eScape, b eSSEilce Of the iÍDl it is Constantly m to the obstacles Or with which the actors on today's are faced.
But the gradu. eCOIm OmieS Of ilir: by tine TNCS is in of the excessive pc. trialized countries. century, the inté Tihird World. On ul the trade circuits industrialized COun as much to the in eCOInOmic policies above all, tale inte: nant groups in Th ries. It seems to century is repeatil nate experience of When the lack Of autOnonOuS esiOrt tery Of te techn. at tie national lev policies Of O doomed to be noth instrument for th the Supremacy Of countries. The cur for the countries O. HaS lasted Since 14 there has been ; celeration Of E financial dependen of a faster rise in neSS as Well as th remacy of the TN tiOn is of all majo the Third World. nology-conSunning

based on exterand maSSive inbort capital g00dS aw exports, he ten that it would to andritize those [- debt;S COIntifa Cted this type Of appy coincided with the tratiSinational our of a new inh Of la bour betteio bai interest. o tinat the indiu Sand their l'NCS est to promote a division. Of labour Viti tie tecië t*2e:r production
iüS prOilta Oility. 1 it is risky to ulate 3, global
actioning of the n iron Willich the ltrieS Cannot eS
very essence of act that countries ecause the very is tile fact that Loving in response the Opportunities NCS - the nail, eCOmOmic - SCele ———
take-over of the di Worldi ContieS pt merely a result Wer of the induSAS in the 19th 2egration Of tine Inequal termis lin dominated by the tries is due quite ature of the local $, which refiect, restis Of the dOmihird World countus that the 20th ng the unfortuthe 19th century,
interest in an tO achieve a maSological processes el meant that the dernization ΥΝΕθ ing more than am e promotion of the industrialized rent phase, which, f the Third WOrld 950, indicates that a dangerOUS aCeir technogical/ ce, in the form rates of indebtede undisputed SupCs in the execuinvestments in Whether the tech
countries have
liberal regimes favouring joint ventures With the NCS or Whether they have regimes of State capitalism and use turnkey arrangements the reSult is the Same: a paSSiVe COI)- sumption of technology, and an increasingly fragmented economy and the poss of control over the ecosystem implied by the decline of agriculture and by uncontrolled urban growth. MECHANISMS OF INDEBTEDNESS
Following the description of the basic C311S€S indebtedness, the mechanisms through which it is achieved will be described.
h e “development' model generally adopted in Third World countries with more Or less chronic indebtedness problems is centered on the satisfaction of the demand of those groups in society with the highest purchasing pOWer, interested in copying consumption models in industrialized societies. his is achieved through a process of modernization of the infrastructure and an accelerated indu Strialization process based on import substitution.
Both processes are linked and
mutually reinforced. This can be illustrated by the introduction of motorcar manufacture or aSSembly,
requiring the construction of roads, which in turn require the development of a road equipment industry. This kind of process leads many development theorists to maintain that it is self-sustaining. But the reality is slightly different.
Te establishment Of țe motorcar in ditul Stry = iS Within the reach of only very few countries.
Capital needs are huge and though technology is very dispersed it is always in the hands of the transnatti Ornal CompannieS dominating the World car market. Consequently, there is a need for foreign investment by TNCs at least to establish terminal plants.
Local Sub-contracting factories then develop around these plants, many of which are Small or medium-sized national companies resorting to public credit to start up and develop operations and need
ing State guarantees to obtain foreign credits needed to import capital goods. Many in turn are
associated to other foreign firms providing them with the technolOgy neceSSary to manufacture automobile parts. Generally, the percentages of national integration of the final product is not very high, since often the TNCs controlling the motor car plant prefer to import parts from other countries
23

Page 26
as a function of their Overall costS Or intra-firm financial movements. On the other hand, the State embarkS On ambitiOuS road COinStruction programmes, even though they have a low coefficient of use, except around the big cities, and although other public Services such as railways are outdated and Overloaded With paSSengers - most Of whom, moreover, Will never be able to own a Ca.
In order to build these road, the State Will resort to credits extended by international Organisations and will use the services of foreign conSulting engineering firms to Satisfy the technical requirements Of these
Organisations. Also, the State Will import road equipment, or if the programme is very ambitious, will
promote the establishment of a road equipment industry, resorting to other specialised TNCs, which in turn Will resort to local companies for the manufacture of Some of the
neceSSary partS.
The result of this Series of Operations will imply: a degree of indebtedness with respect to credits accompanying the entry of foreign capital; further indebtedness for capital goods imports of local Companies manufacturing parts; the increase in imports corresponding to parts not manufactured locally and further Sums for inputs to be used in the manufacture of parts. If the country has no oil, then there Will alsO be an increase in Oil imports, and in refined products, and perhaps also a plant to refine imported oil. Most of these imports except for oil, will be on credit, backed by a government guarantee. The State Will have in turn contracted debts for the roadbuilding programme.
The Volume of debt generated in this way can be considerable, but it is assumed that the development of the motorcar industry Will result in an increase in economic activity
permitting increased exports Of other products. This increase will cover the payment of debt Service
and the regular increase in imports of inputs, renewal of equipment and fuels.
The problem begins when it becomes evident that the massive introduction of the motor car, while satisfying the expectations of most of the middle and upper income groups, not Only has not solved the
transport problem, but has not generated greater exports, whether directly or indirectly, which can
Ook after the indebtedneSS On Which
24
it was based. happens with the try, with refriger: Other COnSumer di have contributed Welfare of popula purchasing powe. GENEP. . . . . but also
In relation to Whole, when base model described ) tOrS Cau Se the ir are reflected in t ner in the balar First, the increaS capital gOOdS foreign investm should be added of inputS. Signific the indu StrialiSati cording to the m more difficult it diminish Such in The reaSOn i S tha which have emer process become centres of the e becomes almost i. strict imports O endangering the ) activity and the ment. ThuS When mentS problems serious, it is usua to run away from promoting new increase import Since investments On the Same basi SOrS, the balance fects of this sub Celled Out Over t
Second, there payments and rer foreign compani become so large balance of inflows plus eventual exp are less than Outfl. capital repatriatic principal, royalties trade marks and
FactorS Such takes place in tra the burden. On T tries arising from ditures already a induStrialised Cour role in this p) analysis carried Ol
* An article pu Minister of the WOrld Bankan portion of our 15% for the pol rates With tha' in December 19 March 1978.

Something similar television industors, radioS and urables, which will to increasing the tion groupS With r and increasing
indebtedneSS.
the ecOnOmy aS a d' On the economic here, various facdebtedness Which he following man
lice Of paymentS. e in imports of not financed by entS. TTO these
increased importS antly, the further On advances acOdel described, the ecomes to limit Or nports of inputS. t induStrial SectorS ged through this the most dynamic conomy and ithus mpossible to ref inputs without Cythm of economic level of employbalance Of paystart becoming ll for governments their problems by investments to substitution, but are usually made S as their predecesOf paymentS efStitution are canjine.
is an increase in mittances made by eS. These Cal that normally the from investments OrtS they generate ows for dividends, in of part of the for patents and additional imports.
Overbilling which -firm transactions, hird World CounR and D expenmOrtized in the tries, have also a OCeSS. Statistical it in Latin Ameri
clearly demonstrate the above. In addition, a good part of the profits made by the TNSS are at the expense either local credit, or
can countries
external credits with the Official guarantee of the host country, When not based on tax breaks offered to attract investments. Taken together, all these factors give a clearer view of the negative impact of this type Of in VeStiment On the balance Of payments.
But balance of payments problems also have other origins. One Of then, little analySted until the present, is the financial cost of their external debts incurred to promote public WorkS. Dut to the basket of currencies in which the loans Of Some international financial Organizations are expresser, their real cost is much higher - due to the COn Stant appreciatiOn Of SOIme Of these currencies - than the nominal rate of loans.
Thus, for example, the which is financed largely Japanese, German a in di Swiss national marketS, paSSes On exchange rate risks wholly to its debtOrS, Who thuS find the actual rate of interest charged on their borrowings from the IMRD marked up several points above the nominal rate.* ܚ
Also, expenditures On armamentS Should be mentiOned aS One of the usual causes of excessive indebtedlineSS.
Data on this type of expenditure is scarce and is never reflected in official indebtedness figures but each time that a country has come forward to rennegotiate its external debt, it has been possible to infer that mist of the differences between figures by creditors and debtorS Was due to un registered purchases of military material, due to its confidentiality, in the books of the central monetary authority. Of course this does not give even a vague idea of the burden of financing such purchases on the indebted
IBRID, On the
ness of many poor countries, but permits the assumption that in many Third World countries in
debtedness is considerably higher than the official figures.
blished in 1978 in a
Colombian review edited by former
Economy, stated that Colombia, was: ".... paying to the
approximate rate of interest in dollars of 18%
for the
debt expressed in Swiss francs, and a dollar interest of tion of our debt expressed in DM' and it compared these
t of 7.6% 77. In “Estrategia
payable on month to month Eurodollar loans economica y financiera',
Bogota:
ECONOMIC REVIEW, SEPTEMBER 1981

Page 27
The theoretical models of this type of development aSSume that all these preSSures On the
balance of payments will be compenSated by increased exports arising Out of steeped economic activity. However, this is not normally the case, due to the weakness of the exporting Sector of most Third World countries (with the predomince of products characterized by unStable priceS, SOme decling Over the long term) and difficulties is moving from export of primary productS to exportS Of nanufactures. Also it is due to the influence of the growth in internal demand, the inefficiency of industries which have been developed pn the basis of high tariff protection and thus cannot complete with costs. On the international market, and finally due to the increasing protectionism Of indulStrialised countries against productS in Which Third World countries have managed to become competitive.
TËThe result of this lack Of Symmetry between growth of importS and Outflows Oil Current account and the slow growth of exportS is a more or less chronic deficit in the balance of payments, leading to increasing indebtedness, described earlier.
In recent years, the governments of Some Third WOrld Countries, in particular in Latin America, have chosen to apply a model whose final objectives are the same - to satisfy the demand of the Sectors with the highest purchasing power
but Which are achieved under different policieS. These have conSisted in eliminating external protection benefitting their industries, While proceeding to major income redistribution resulting in the notable drop in real wages, while
promoting the entry of foreign capital and meeting balance of paymets problems by increasing indebtedness in the form of bank loans.
These policies have been aimed at making their industry “competitive' and facilitating the increase of exports of manufactures and semi-manufactures, based on low labour costs and in Some cases on the availability of comparative advantages derived from the low production costs of certain inputs.
Until now, the result has been almost the same in all cases. First, a huge social cost, in terms of high unemployment and repressive meaSures to oblige Wage earners to accept the reduction of their real
ECONOMIC REVIEW, SEPTEAIBER 1981
earnings as well income redistribu higher income gr have a higher pl a Índi invest.
Second, a maj in many caSeS ha ficant dirOpS in the liquidation 0. part of national iI interplay of fallin recession, competit WhoSe entry is fa mantling of effect by the exchange high cost of mOine ing of interest ra emergence of a n cornering In OSt Cf this type of polic replaced the pli - Vhic as tur activities or the i it used to manuf of foreign capital direct investments very great in any perhaps when it sale of public c handing over to g natural TeSOUTCe tionalised. inflati impressive levels Which it was t rapidly eliminated Inained at thine Sar due to the increas ing from the liqui and tariff di Sinant the disappointing exportS - due e production problen Of access to m trialised countries, demand due to th Si On.
In the case C have not followed model, when they point in their il have either had markets for loans problem by reso: harkets for loans vious debts, or to Monetary Fund t term financing applying the rec favoured by the known consequent critical cases to scheduling, with COn Sequences. *
* Sid-Ahmed, Al for the CID pr Third World FC JOSé M. “LDC C Zaļo G. 'Mīti project.
 
 

as the weight of tion in favour of Oups, aSSumed to "opensity to save
or recession which 3 resulted in signiGNP. Third, the a COinSiderable ldUStry, due to the g Sales due to the ion from importS youred by the disive protection and policies and the y, due to the freetes. Fourth, the eW financial class, the benefits of y and which has 'eviouS industrial hed to Speculative mport of products acture. The entry in the form of have not been CaSie except has been for the Ompanies or the rivate interests of S previously naOn has reached and indebtedness hought could be has either reine level, or grown, 3e in imports arisdation of industry ling, as well as to performance of ther to internal ns, to difficulties arkets of indusor to decreasing Le general reces
if countries which the traditional 7 reach a critical indebtedness, they l to postpone the to amortize prert to the capital to amortize prethe International iO obtain shortin exchange for essionary policies IMF With their
last analysis,
As can bee Seen these are all dead ends arrived at by the development paradigm and adoption or imposition of development models only taking into account the interest of a part of society.
CONCLUSION
An exhaustive study of the “development' paradigm clearly goes well beyond the limits of this paper. We hope, however, that our eforts to situate the phnomenon of indebtedness in a broader framework will help dispel the illusions of the purely economic approach, which prevails in the literature on development and underdevelopment as well as in the solutions advocated to escape the “bottlenecks' and “vicious circles' of underdevelopment.
For this reason we think that there is no isolated remedy to the problem of the excessive indebtedness of the Third World, and no neat financial prescription. The recurrence of indebtedness and its increase have to do with the overall functioning of exploited and blocked societies, and thus, in the With the very nature of the kind of society intended by their ruling eliteS.
To change the pattern of development and breaking the thousand and one links between technological dependence and financial dependence is a long business which involves upsetting large numbers of conventional notions about development. Yet only such a break with the past is capable of bringing about new types of planning, based as a matter of priority on an internal command of the national economy and of technology, and in the mobilization of internal savings in Order to disSeminate local prOductivity. It alone is capable of breaking the mechanisms of excessive profit of the TNCs and, therefore, the mechanisms of unequal trade which is reproduced, on an amplified scale, from century to century, as the technological gap between industrialised and Third
Ces, or in most World countries continues to Widen. further debt re- It is only in this framework that equal or graver alternative models for developmeat
can begin to take shape.
bdelkader “The IMF Conditionality” document prepared
oject on “Debt and Development' to be published as a
orum Occasional Paper;
Lichtenstejn, S. and Quijani,
ebt and international private banking' and Martner, Gon
lational Debt Renegotiation',
documents of the above
25

Page 28
The Rubber
By M. Nadarajah
Sri Lanka's RSS and Latex Crepe can both get good prices if the presentation and marketing of these rubbers is improved. A rehabilitation of Sri Lanka's rubber industry will also require a planned approach at Governmental level for manufacture of rubber based products and for providing central processing facilities to the private sector. particularly small holders; maintains M. Nadarajah, an FFR and F. Chem. (Ceylon), who was for several years a senior officer of Sri Lanka's Rubber Research Institute and is now a Marketing Consultant to the rubber industry and trade.
Natural rubber (hevea brasiliensis) has been in existence in Sri Lanka for the last hundred years. It is of vital significance to the three major plantation districts of Kegalle, Kalutara and Ratnapura; it accounts for about 15 per cent of Sri Lanka’s export earnings; and provides employment for about 500,000 persons engaged in all aspects of the industry. The future rapid expansion of rubber production in Sri Lanka is limited as there is lack of Suitable new land for planting with Hevea brasiliensis; due to neglect of replanting the yearly production may drop to even as loW as 100,000 tonnes per year in 1986 from the present 130,000 tonnes and for the continued prosperity of the rubber industry, the years of neglect
ed replanting must be caught up. Whilst there is no suitable land for
Mark
new rubber plant to grOW Hevea B be suitable arid and East Of Sri guayule which natural rubber. native to the de Texas USA and S by these tWO COU cially exploit thi Of natural rubbe
Though natur tant tO Sri Lanll ployment and fol ings, it is compa. producer of rubb produced about natural rubber Wi tion of natural 3,850,000 tonnes and synthetic r of about 12,450,0 Lanka productio: cent of World rul
When COnSideri even this Small is necessary that value be obtaine produced. Today, Sold and not mar between selling a Selling focusses Seller and marke buyer. As long supply it can be there is a diffic getting fair pric marketed. Synth production which the last 40 years consumption of owes its Success thods of market marketed as an rial and Sold dir through a techn traded in a nar. agricultural pri
TABLE 1 TYPES OF NR IN TONNES PRODUCED I
Type of Rubber
RSS
Latex Crepe
Scrape Crepe
Sole crere
Latex
Technically specified rubber (TSR)
Total
26

at Situation
ing in the Wet ZOne rasiliensis there may areas in the North Lanka to plant is also a source of Guayule is a shrub serts of Mexico and teps are being taken intries to commerS Shrub as a SOurce
.
all rubber is imporKa as regards ΘΙΩΩ -- 'eign exchange earnratively a very Small er. In 1980 Sri Lanka. 133,000 tonnes Of th a World consumprubber of about and a total natural ubber consumption 00 tOnnes. ThuS Sri n is abOut One per ober consumption.
ng the marketing of amount of rubber, it the highest market d for the rubber Sri Lankan rubber is keted. The difference nd marketing is that On the needs of the ting on the needs of as NER is in Short easily sold but if 2ulty in selling and es, then it muSt be etic rubber (SR) has grown during from nil to a yearly nine million tonnes tO itS modern meing Whilst SR is industrial raw mateect tO itS COnSUlmerS cal salesman, NR is ner similar to most
mary commodities.
N SRI LANKA
P
1979 1980
81,800 72,400
36,300 31,800
15,500 13,400
4,800 4,300
1,100 1,500
13,200 9,700
152,700 133,100
Only Malaysia of all the natural rubber producers have made SOme effort at natural rubber marketing. Thus though NR is superior to SR in many respects, this has not been sufficiently impressed on consumers and this is one of the reasons for the depressed NR. prices. Further, the demand of consumers is increasing year by year as far as the quality of NR is concerned. The main reason is that simple finished goods which are easy to manufacture are being produced in the developing countries and also in the NR producing countries where wages are low and only the very complicated compounds are being processed in developed countries, and this means that the raw materials must have a high quality standard. A type of NR in demand is the constant viscosity type and Sri Lanka should endeavour to produce and market this special rubber by the addition of a viscosity stabiliser and if necessary a peptising agent.
Table 1 gives the types of NR ಖ್ಖuced in Sri Lanka in 1979 and
RSS
It will be seen that RSS is a major rubber produced in Sri Lanka. From 1952 upto very recently the export RSS 1, 2 and 3 was the monopoly of the Sri Lankan Government and nearly all Of it was sold on a barter agreement to China at prices higher than those obtaining in the open market. This price was passed down by the Government to the Small holder and this has had a stagnant effect on the rubber processing industry in Sri Lanka in that it severely limited efforts to divert Small holders latex to other types of specialised rubbers such as centrifuged latex, latex crepe and technically specified rubbers. Thus Dunlops Limited who had a centrifuging plant in Sri Lanka. and were exporting 5,000 tonnes of rubber as centrifuged latex closed their plant in 1957. Further the State Rubber Manufacturing Corporation who were manufacturing a technically specified rubber SLR5L from Small holders latex had to be given a duty rebate to be viable.
Now RSS 1, 2 and 3 can be exported by the private trade but finding markets takes time. It has been the practice for the last 30 years not to press the RSS during baling as this was a reduirement by the Sri Lankan Government to facilitate easy inspection of rubber being shipped to China, by Surveyors of the Commissioner of Commodity Purchase. However, if the RSS is not adequately pressed during baling 1) the bales get out of shape and are difficult to handle 2) moist air can get into the rubber sheets
EconoAAIC REVIEW, SEPTERBER 1981

Page 29
and cause the formation of mould. If RSS is to be exported in the Open market, it will have to be well pressed. Very few shippers have at preSent the necessary presses or experience in pressing. This problem of improved pressing must be solved without delay. Otherwise it will not be possible to improve the image of the Sri Lankan RSS quality overSeas. Consumers require well pressed
RSS bales free from mould.
LATEX CREPE
Sri Lanka is the World's largest producer of thick latex crepe. The reaSOn for Sri Lanka producing thick rather than thin crepe is that packing is not done by the producer but by the shipper and this delay in packing is more liable to cause mould growth in thin crepe than in thick crepe, and mould is a very Serious defect in latex Crepe. If thin crepe is to be exported, then a fraction must be removed and hot air drying to give improved mould resistance to the thin crepe.
Malaysia also produces latex crepe, but after 1970, has been agressively promoting the technically specified rubber SMRL, as a competitor to latex crepe. We have done nothing to counter this competition and if this goes on Sri Lankan latex crepe will suffer a natural death. At present marketing of Sri Lankan latex Crepe is only on colour and not on technological properties and in future technological marketing will also be needed. Sri Lanka should produce latex crepe grades Superior to SMRL flot Only in colour but also in technological properties and advertise and market these grades to the consumer. In the case of SMIRIL, it is not possible to take a fraction, whilst this is possible with latex crepe. Hence a policy decision should be taken to produce almost all Sri Lankan latex crepe after taking a fraction. This was advocated by me as far back as 1971, but it has still not received the attention it deserves. There would be two grades marketed. They are
A) a fraction taken and no bleach
ing agent used
B) a fraction taken and a bleach
ing agent used
Grade A would be the purest form of natural rubber. With IlO toxic chemicals in it and Would be used to manufacture rubber products for Surgical and pharmaceutical use. An important use of latex crepe is to make remilled sole crepe and either grade A or grade B could be used for this purpose.
Since Sri Lanka is the World's main producer of latex crepe, forward sales for at least one year
should be permitted for latex crepe rather than the six months permitted at present.
It is necessary to point out that the use of boric acid as a secondary preservative in the manufacture of
ECONOMIC REVIEW, SEPTEMBER 1981
La can cause seriol Consumer which p encountered if la cient market prom done as yet by S light this superiori
SOLE CREPE
Though Sole C Originated in Sri ] the World's bigges' Crepe with a prod tonnes per year. S about 5,000 tonnes year and remilled : 22,000 tOnnes per factured in Italy. Europe, using as material Sri Lanka quality of remille inferior to top qua crepe and consume Sulted in there bei rnand for remilled reduction of an im Sri Lankan latex for the inadequate present for Our lat would be to produc tation sole crepe demand rather th latex crepe for co inferior remilled SC
The production alaySia iS eXpecte decline due tO Sel labour in that ci crepe manufactul tensive. SOle Crepe a product and th rubber product. Wh labour as Sole Cre: Lankan GOVernmer consider giving SO tives offered for r any private indust to lake Sole Crepe With a fraction re material. The incen investment relief a
Further, since so duct used in footV COUntrieS, and hav it should only b for Ward Order S. At Ward Sales for a pe are allowed. HOWe increased sole pro Lanka, forward sal two years should b
The impOrtance (larket promotion of latex crepe was Centenary Internat ference held in S back as 1976. Salies advertising Our pr matic manner anc service will ensure will stay with us a about the Service v. Imakes the use Of easy. However th Serious lack of si logical promotion o berS.

S problems to the roblems are not,ᎾX Crepe. Suffption has not been Lanka to highy.
Тере production Lanka, Malaysia iS producer of SOle lction Of 20,000 ri Lanka produces Of Sole crepe per Ole Crepe at about year were manuUSA and Western the principal raw In latex crepe. The il sole crepe is ity plantation sole Ir reactiOn has reng a reduced desole crepe. This Ortant demand for Crepe is a reaSOn prices fetched at ex crepe. A remedy e top quality planto meet World an exporting Our In VerSiOn tO al le crepe.
Of Sole Crepe in d to show a steady lous shortages Of Ountry, as SOle ce is labour incan be considered ere is no other ich uses as much pe. Hence the Sri ht Should seriously me of the incenubber products to rialist who wishes u Sing crepe laceS moved as the ras tives suggested are ind a tax holiday.
e Crepe is a prOwear in temperate ing n0 Other use, e produced On present only forriod of six month.S ver to promote duction in Sri es fOr a period Of e permitted.
! of technological Of Sole crepe and highlighted at the Onal Rubber ConCri Lanka as far promotion means )duct in a Systethe after Sales hat our customers (nd will also speak 'e provide, which Our product SO 're has been a gnificant techno-r * Sri Lankan rub —
TECHNICALLY SPECIFIED RUBBERS
Sri Lanka, produced in 1980 about 13,000 tonnes of scrap crepe and a fair amount of RSS 4 and 5. These can be blended and converted to technical specified rubbers of the SLR 10 or SLR 20 to give a higher value and a better product rather than exporting them as scrape crepe on low grade RSS. This should be possible as licenses have been recently granted by the Sri Lankan Government to eight additional block rubber factories thus enabling more than 50,000 tonnes of TSR to be produced in Sri Lanka. The production of TSR in 1980 was about 10,000 tonnes.
SMALL, HOLDERS’ RUBBER...
About 67 per cent of rubber land in Sri Lanka is owned by small holders who produce about 50 per cent of Sri Lankan rubber. To enable then to produce high quality rubber, it is necessary to centralise their manufacture. The product could be as RSS, latex crepe, TSR (5L) or centrifuged latex. Some success has already been achieved in this respect.
In RSS manufacture, there are in Sri Lanka over hundred Group Processing Centres producing about 4,000 tonnes of high quality RSS using small holder latex. Some success has a lso been achieved in latex Crepe manufacture using small holder lateX. The SRIMC manufactures ab Out 1,500 tOnnes of high quality latex crepe annually, several private sector factories are making high quality lątex crepe and sole crepe, and OrganiSations such as the SPC, JEDB and the BRISL are making some latex Crepe. However, the total amount of Such latex crepe produced would be about 3.000 tonnes per year. The SRMC also produces annually about 2,000 tonnes of SLRSL which is a TSR from small holder lated. The SRMC, Ceylon Cooperative Industries Union Ltd. and GloWeave Rubber Ltd. are manufacturing centrifuged latex using small holder latex and they use about 1,000 tonnes of rubber as latex. Thus central processing caters for only about 10,000 tonnes of small holders latex rubber, whilst the amount available is as high as 50,000 tonnes.
Eience, greater emphasis must continue to be given to the central processing of Small holder latex rubber, price for the latex produced by him. RELATIONSHIP BETWEEN RSSI PRICES AND PRICES OF OTHER G3ADES OF RUBBERS
RSSI has always been adopted as the yardstick in trading natural rubper. The prices of the other rubbers are always influenced by the RSSI price but their degree of fluctuation is notably less than for RSS1. This is because RSS1 is the only grade used for hedging purposes and its price is called a paper' price as against a “physical' price.
27

Page 30
In all major rubber markets, there exists “physical’ and “futures' markets. In the physical market trading involves delivery of physical rubber. In the futures market, trading is not intended for the delivery of physical rubber but is done for hedging purposes against any risk of price fluctuations. This is called “paper' rubber. The rubber market is Very sensitive to economic, monetary and political developments in the producing and consuming countries.
Prices of RSS 1 quoted by the Commissioner of Commodity Purchase based on the Singapore FOB market are nearly always higher than the CRTA price for RSS 1 in the Colombo market as the freight is not correctly computed. The Commissioner of Commodity Purchase is therefore not in a position to physically buy all the RSS 1 offered at the prices advertised by him.
CONCLUSION
In conclusion it can be stated that Sri Lanka is a producer of high quality rubber whether it is RSS, latex crepe or sole crepe.
a) There is stili a world demand fer RSS and Sri Lankan RSS can get the good prices it deserves if she improves the presentation and marketing of her
RSS:
b) Sri Lanka is the world's largest producer of latex crepe but because of lack of market promotion its use is being superseded by the block rubber which can be considered an inferior product. With the necessary market promotion and improved presentation of our latex crepe in 331/3 Kg or 50 kg bales in block form good prices can be obtained for our latex crepe. Further its production can be easily stepped up in the existing crene factories to cater for any increased demands;
c) A planned approach at Governmental level is necessary to step up the manufacture of products based on natural rubber for export. In this context it is recessary for the Sri Lankan Government to accept that sole crepe is also a finished product which suffers from high import duties from consuming countries and that its production in Sri Lanka. should be actively encouraged;
d) Central processing facilities must be provided by the Sri Lankan Government and to some extent by the private sector, to the smallholders who produce about 50 per cent of Sri Lankan rubber. This could be done easily by the Government as nearly all the major raw rubber processing units in Sri Lanka are Government owned and come under the BRISL, SPC, JEDB and SRMC. These organisations have the necessary (ΕΣΚpertise and hence should play a key role in stepping up the quality of smallholders' rubber to enable small holders to get fair prices for their rubber.
28
Natura
The market
better future for Seem to be in pla producers to take opportunity, argue Sent Chief of th Export Projections World Bank. Rep. conclusions from 'The World Ribb
ture, Changes, and
In 1973, the nonny Suffered its the oil crisis and
riSe in Crude Oi the recession int. tries. For synthe
depends So heavi cals, the Sudden ( CrVI de Oil prices i a majOr Change ir tion (see Chart per cent of the Synthetic rubbers COStS Of petroche and energy. BetW these costs more i and overhead cha: as a result, the a ducing Synthetic ing facilities incl cent to 100 per | trial countries.
Natural rubbe directly—the aver producing rubber up by about 30 pe: and 1974. The il ever, still subject effects of the oil Of World inflation Sle expectati doubts ab Out the of World demand energy-intensive t;OI.
Doubts about future of the rub ened during the that affected the tries after 1973. duction fell, SO di automotive indu World demand fo 1978 and 1980 the again in CreaSed terms, bringing t crease since 1973 per cent... COStS an tic rubbers went expected profitabi ments, facing in cost pressures a OutlOOk for deman theľ. Actual inVeS plans for new in thetic rubber cap: cOnne to – a halti Ol planned economie
It is generally future rate of exp mand for all rub
 

Rubber:
conditions for a. natural rubber ce: it is up to the advantage of this 's Grilli, the preCommodities and Division of the oduced here aIE his recent paper on *r Economy: Struc
Prospects'.
--
WOrld rubber ecofirst severe jolt: subsequent sharp l prices and then he industrial countic rubber, which ly On petrochemilirastic increase in n 1973-74 implied costs and producl). AS much as 70 production cost Of depends on the mical ingredients een 1973 and 1975, han doubled, labor rges went up, and verage COSt Of prOubber from exist-- reased by 70 per cent in the indus
r Was less affected age direct cost of in Malaysia, Went r cent between 1971 industry was, howto all the indirect crisis: acceleration l, changes in conOMS, and rising long-term future for rubber in the automotive SeC
the long-term ber industry deepecOnOmic – receSSiOn industrialized COunAs industrial prOid the output of the stry, and so did ir rubber. Between e price of crude oil
sharply in real he cumulative into more than 400 d prices of syntheup again and the lity of new investaddition to Severe
more uncertain d, deteriorated furtments as well aS VestmentS in Synacity have virtually Lutside the centrally S.
expected that the ansion of world deberS Will be bellOW
A Better Future
historical trends in the next 10 - 15 years-perhaps by as much as 1 to 1.5 per cent per annum. These expectations are borne out by detailed analysis of future World demand for rubbers. The basis for this analysis is, first, the prospects of slower growth in economic activity in the 1980; and, second the structural changes expected in the relationships between economic activity and rubber demand, brought about by changes in consumer choices in transportation and by government policies affecting 器 production and use of motor vehiCIeS.
This slowdown is likely to be more visible in industrialized countries, where the major structural changes in demand are expected to occur and where demand for rubber is already high. The reduction in demand is likely to be less marked in the centrally planned economies, Where the consumption of rubber is lower and is less affected by consumer chOice and by changes in income and industrial production. Strong growth is still expected to continue in developing countries, particularly in high-income developing countries, where the use of motor vehicles is increasing.
BETTER MARKET PROSPECTS
A key question posed by these developments is whether the relative market postion and future prospects for natural rubber have also deteriorated with the worsening prospects for the Overall demand for rubberS. The prospects for rubber depend critically on the competitive position Of natural vis-avis Synthetic rubbers and on those developments of technology that affect the choice of rubber inputs in the production of rubber products. Analysis of these factors shows that on both countS natural rubber is potentially in a better market position than at any Other time in the recent past.
The long-term competitiveness Of producing natural rubber from existing trees has improved considerably, given the evolution of costs and priCes in the SecOnd half Of the 1970S. It is estimated, for example, that to have invested profitably in SBR production in Western Europe in 1977, the industry would have needed future real prices of at least 40 cents per pound. Edually profitable investments in natural rubber in Malaysia would have required a. future real price of about 35 cents per pound. The profitability of natural rubber investment would have been even greater in relation to kinds of synthetic rubbers, such as polyisoprene. The 60 per cent increase in the real price of oil between 1977 and 1980 has added at least another 7 cents a pound to
ECONOMIC REVIEW, SEPTEMBER 1981

Page 31
the future expected price necessary to invest profitably in SBR. The crude Oil price increases expected price necessary to invest increases expected in the 1980s will further improve the long-run competitiveness Of natural rubber.
ClOSely reflecting the climb in the prices of synthetic rubbers (which in turn followed the upward trend Set by crude oil prices), the prices Oi na atural rubber increased markedly in the second half of the 1970s (See Chart 4). Natural rubber price trends are set to a large extent by those of synthetic rubbers. While in the late 1906s, falling synthetic rubber prices pulled down nautral rubber prices since 1973. More important
yet, rising Synthetic rubber prices and favourable product deveoptments- Such as the Spreading
use of radial tires, which require relatively more natural rubber than Other types of tires-have contributed to reverse the long-term decline in the real price of natural rubber. After fallling by more than one half in the 1960s, real prices of natural rubber have increased by about 45 per cent between 1972 and 1979. This reversal is not likely to be a temporary phenomenon. It is expected that the real prices will continue to increase in the 1980S, aS demand for natural rubber goes up and the prices of synthetic substitutes follow the trend set by rising real energy costS.
Another reason to be sanguline about the future for natural rubber is that the Scope or future productivity gains in the synthetic rubber sector appears to be more limited than it was. Outside the field of Specialty rubbers, technological innovations in production and economies Of Scale, which were the majOr factors behind the exceptionally fast growth of general-purpose rubbers in the postwar period, appear to have almOSt run their course. Their future effect is likely to be much less strong than in the 1950s and 1960s-although it will by no means be negligible. The Synthetic rubber industry Outside the centrally planned eCOmOmileS is reaching a nature stage where emphasis is likely to be on rationalization, consolidation, and better planned growth. Inside the centrally plannned econOmies expansion prograIns ae likely to continue for the sake of Self-suficiency, regardless Of deve
Opments in WOrld rubber marketS.
Apart from theSe economic cOnstraints to further rapid growth, the synthetic rubber industry will alSO face greater uncertainities than in the past, about the availability and prices Of chemical feedstocks and mounting preSSureS Over environmental and haelth SSues.
ΕΧΡΙ ΟΙΤΙΝΟ ΤΗΕ ΡΟΤΕΝΤΙΑΙ,
The natural rubber industry is in a favourable position to take advan
ECONOMIC REVIEW, SEPTEMBER 1981
tage of the prese pOrtunitieS. Desp prospects, howev grOducers Will né impOrtant condit take full advanta favorable market
(9 Natural have to keep pac grOWith in dema. tic replica is Opre Secure Supply w Sl) redi.
és Existing tiOIn technOlOgieS adopted both COuntries.
& Research, ket denland for i Clearly Of the ut yet it is un Certaj belo producing COl On the basis Of On the area un ( jected yields of grOund, and On e planting and ne pears likely that 1980s natural r grOW at rates b{ ket neeedS. EV en latively conserv (?.OIncerning the g] isoprenic rubber planned eCOn Omi Optimistic assess) grCo With Of natura existing planting lings Scheduled t duction, there i betweeen supply the end Of the 1
If this gap i creased Supplies C will probably be pGlyisOprene. Syl producerS OutSide du Cers Outside til lled eCOn OmileS h. and, mOre import 2nvestment lagS. duction can be pidly, their inv | lOWer. Yet analys Iy that natural ihave a substanti advantage over least under know nOlogies) and tha and economic pot per can fill the gap for isoprenic 1980s.
En Cugh capit private Sources S tO expand the V natural rubber. " In Ot. Only available ly well proven. La and replanting i tries such as In
land and, to a les Brazil, the Peop. China, India the
West Africa also new and higher

nt good market Opite these favorable er, natural rubber led to fulfill several iOns in Order to ge of this potentially
Situatl On:
rubber Supply will 'e with the expected nd for the Synthenic rubber, and a ill have to be a S
Successful producWill have to be Within and a CrOSS
development, marSOprenic rubbers is Jim Ost impOrtance— „In that natural trub — untries can fulfill it. Current informatlon der rubber, On protrees already in the xpected rates of reW plantingS, it apt beyond the early lubber supply will el OW pOtential marOn the basis of reative assumptions OWith Of demand for Outside the centrally es and a relatively ment of the likely | rubber supply from S and from plantO come into prOis likely to be a gap and demanded by 980s.
S not filled by in)f natural rubber, it met by Synthetic nthetic pOlyisOprene the centrally planhe centrally planave spare capacities tant, much shOrter
Since their proincrea Sed mOre raestment risks are is shows quite clearrubber producers all competitive COSt
pOlyisoprene (at 7n production techt, with its technical Jential, natural rub —
potential demand rubber in the late
all from public and hould be available VOrld production of The technology is 2 but also reasonabind for new planting S plentiful in counionesia and Thaiser extent, Malaysia,
le's Republic Of 2 Philippines and offer scope for
production of natu
ral rubber. Even With current a Creage, Supply can be increased considerably by Speeding up Current replanting and using higher yielding varieties of treeS. Chemical Stimultants can also increase Output rate:S írOn existing Old treeS.
Expanding Output to meet narket needs will involve, over the next 25 years, Substantial changes in the country distribution Of natural rubber production. The relative importance of Indonesia and Thailand, where new land and labor are more abundant than in Malaysia, Will probably increase. In the long term, the People's Republic of China, and eventually Brazil, could become majOr natural rubber prOducers. The modes of production may also change substantially, with single Smallholders becoming less important at the expense of cooperative types of smallholding Organizations,
offering members OOIY1ΙΥ1ΟΙΩ. infrastructural Supprt in both the production and the processing Of the rubber latex and sharing the Ownership Of the productive unit. There are Strong economic and
technical reasons-as well as examples f success—for this type Of Organization. Geographically, however, the location of the industry Will not change much, with Asia accounting for most of the world Output.
The possibility of expanding natural rubber production will also offer unique employment Opportunities in agriculture to countries having a large and underemployed labor force.
It also offers scope for tangible and Sustained productivity growth. Expected future price and
productivity trends should leave -ample rOOm fOr increa Sing real returnS to producers.
Natural rubber producing countries have shown Willingness to COOperate With each other, to Share technological advances, and to further research. In October 1979 they alSO entered into a new agreement With consuming countries to stabilize market prices. The new International Natural Rubber Agreement that came into effect in 1980 foresees the use of a fairly large buffer stock to keep market prices from exceeding a predetermined, but flexible, band Of fluctuation. If it is SucceSSful, market stabilization will make natural rubber Supply more secure and reduce the volatility of the price Of natural rubber for its users. Together with sound policies concerning production and exports, the Agreement can give added impetus to the resurgence of the natural rubber industry. The market conditions for a better future for natural rubber seeem to be in place: it is up to the producers to take advantage of this Op
Ortunity.
29

Page 32
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