The development bubble of Sri Lanka is on top of a debt bubble

(September 07, 2010, Colombo - Lanka Polity"The country has been liberated for more than 15 months but has not recoded any significant large scale private investment, which is puzzling. The government and the private sector have to come on to a common ground in order to achieve a high economic growth, the mind sets of both has to be one in order to gain an economic victory," John Keells Holdings Chairman Susantha Rathnayake told the Lessons Learnt and Reconciliation Commission of Sri Lanka yesterday afternoon.

"The private sector has to play a vital role in the development process and should be encouraged to invest. FDIs are necessary for the country’s development and should be encouraged. The private sector in the country alone cannot go ahead with the development activities without adequate capital to invest. We should focus on attracting large players who will help develop the country in the long run, rather than the small investors who come in for a quick buck," he said.

Jayampathy Bandaranayeka, the chairman and director general of the country's state-run Board of Investment (BOI) also expressed the same views in an interview with Reuters "We are unlikely to move beyond $1 billion (in regard of Foreign Direct Investment) and investments would be more in line with what was achieved last year." Last year Sri Lanka achieved US $ 602 million.

These two statements are indications of the crisis behind the development bubble of Sri Lanka.

Sri Lanka has accelerated infrastructure development. Harbors, airports, expressways, coal power hoses and many more constructions are underway funded by massive loans obtained from international financial markets.

Latest reports of Central Bank of Sri Lanka shows that the local and external debts of the state has sharply escalated.

The report says that the unpaid debt has increased by 4.5% now compared to the end of 2009.

According to economic indices of the Central Bank of Sri Lanka the accumulated local debts of the state in May 2010 rose from Rs. 2521.5 to Rs. 2544.2 within a month by Rs. 22 billion.

Overall foreign debts of the government by end of May was Rs. 1777.9 billion and it rose to Rs. 1803 billion by Rs. 26 billion within a month.

By the end of June, the total unpaid debt of the government was Rs. 4347 billion and it is an increase of Rs. 54 billion from May. At the end of May the state debt remained in Rs. 4293 billion, Central Bank reports show.

The development bubble of Sri Lanka is on top of another bubble, i.e, debt. How are we going to continue paying back these massive loans? In 2009, Sri Lanka state spent 86% of the Gross Domestic Product to for loan repayments. The repayments of external loans cost 36.5% of GDP.

The government has made each Sri Lankan indebted Rs. 217,350 and of this massive indebtedness, Rs. 90,150 is to foreign countries, as per end of June.

In line with this trend, the government will not be able to maintain the ability to continue to obtain loans continuously.

When the debt bubble bursts, what will happen to the development bubble?

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