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The government's main justification for floating the bond on the international market is that it needs investment funds to develop the war-destroyed economic infrastructure in the east. The government argues that it is unable to get concessionary finance from donor agencies because Sri Lanka is now a middle-income country. Unlike commercial loans that have a high rate of interest but give the borrower flexibility in the usage of the funds, concessionary loans from donor agencies have low rates of interest but strict conditions imposed on its utilization.
Taking a loan makes perfectly good economic sense if used for productive purposes, where the loan leads to the building up of an economic asset that generates a stream of income, which can be utilized to repay the loan. However, if a loan taken at commercial rates of interest is used for the purpose of consumption without creating a new economic asset, then, repaying that loan becomes a big burden in the future, where people are already over burdened with taxes and inflation.
Currently the low intensity war that the government and the Liberation Tigers of Tamil Elaam are fighting creates an unstable and insecure environment especially in the north and east. The militarization of daily life in the north and east is illustrated in Jaffna, where every resident over the age of 10 years is required to carry an identity card issued by the military authorities. Even areas that are under the control of the government are subject to regular LTTE infiltrations and guerilla attacks. In these circumstances, it is almost certain that the foreign exchange made available to the government by the sovereign bonds will not be used for infrastructure development in the east.
Instead, it is likely that the money will be utilized to meet the most urgent priorities of the government. Chief amongst these would be to face the military challenges that have arisen from its strategy against the LTTE. It is no secret that the government requires substantial economic resources to combat the unconventional military tactics of the LTTE. Utilizing a commercial loan to fund the military machine may be viable in the short term but would put the country's finances in a perilous situation in the long term.
The loan issue has been politicized with the major opposition party challenging its viability and legitimacy. Opposition leader Ranil Wickremesinghe has stated that a new government headed by him will not repay the loan and will even cancel the license of the Hong Kong and Shanghai Banking Corporation - one of the banks floating the bond on the international market, if it breaches Sri Lankan laws. He has also warned that he will call on the people to protest against the HSBC in the event of further economic hardships to the people.
Critics of Wickremesinghe have pointed out that international law is clear in affirming the duty of a successor government to honor the legal obligations of its predecessor. However, international law is also a rapidly evolving arena of moral and ethical responsibility. The call of former colonies for reparations of past injustices on comfort women and violations of their human rights and the positive responses of some of the countries that are responsible, are part of an evolving international community. The concept of corporate social responsibility in economic contracts may become a new feature of international law in the future.
The issue of the sovereign bond is enabling Wickremesinghe to change his image with the public who are likely to be more receptive to the economic rationality of his arguments. Economic rationality notwithstanding, Wickremesinghe could end up with a lower reputation for being too oriented towards the international community. In the past and even today, racist elements in the government and the government's nationalist allies, have taunted him for being too deferential towards the international community and for being prepared to divide the country at their behest. However, the issue of the sovereign bond has given him a just cause to project a more nationalistic image; one he might well wish to consolidate in the event of returning to power.
What is tragic about the unfolding drama is that once again Sri Lanka is heading on a course of confrontation with more conflict within itself and with those who would rather be its partners than enemies. A country that needs healing and reconciliation is growing more polarized and its conflicts more intense. Sri Lanka needs peace at all levels if the economic resources of the international community are to bring development and prosperity to the people.
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(Dr. Jehan Perera is executive director of the National Peace Council of Sri Lanka, an independent advocacy organization. He studied economics at Harvard College and holds a doctorate in law from Harvard Law School. ©Copyright Jehan Perera.)
