Sunday, February 19, 2012

Does Arujuna Sivananthan have a Axe to Grind by commenting on Sri Lankas economy

Of late there have been many articles that have been lamenting on the dire state of Sri Lanka's finances. One such author is Arjunan Sivanathan who has written a couple of article on DBS Jeyarajs blog and websites. The articles are Downgrade and Foreign Exchange Controls in Sri Lanka : A Probability or an Inevitable Certainty?, Sri Lanka Engaged in High Stakes Game of Poker with Their Largest Trading Partners and IMF tranches for Sri Lanka: Costly money or costly political choices?

Arjunan Sivanathan says that
• “Sri Lanka's external indebtedness is approximately 40 percent of GDP; also well above its single-B and double-B rated peers.”
• “Any reduction in both will be difficult to achieve while defence spending continues to account for 20 percent of government disbursements and post record highs each year”.
• Its Current account deficit will be 20 percent of GDP in 2011 and will increase in 2012. Geopolitical developments in the Middle-East have already taken their toll on its balance of payments and will continue to do so.
I would agree Sri Lanka's external indebtedness sounds rather bad. But then compared to a few other A rated countries its does not appear too bad. So for comparison, I have presented below GDP, External debt and Balance of Payments of a few first world countries.

Country GDP
(Billions USD)
External Debt (Billions USD) External Debt Per capita External Debt as % of GDP Balance of Payments (Billions USD) Balance of Payments as % of GDP
United Kingdom
New Zealand
United States
Sri Lanka
As one can see from the Table the West is having a financial crisis. The populace in UK owes about USD 144,000 or roughly Rupees 150 lakhs per man woman and child to external countries. In the US each man woman and child owe about USD 50,000. Given such large debt levels for the UK and US the only way out is to either default i.e. stop paying debts or devalue the currency. Luckily for the US and UK most of their debt is sovereign debt, i.e the debt is in their own currency and so it is likely the debt will be reduced by currency devaluation.

Compared to the US and UK every man woman and child in Sri Lanka only owes about USD 900 or roughly a One lakh of Rupees. When viewed in this context, Sri Lankas finances do not appear to be all that dire.

Another is the lesson to be learned is that of Argentina. A few years back, Argentina was staggering with a huge debt load and was been advised by the IMF to implement austerity measures much the same way as for Greece. However, Argentina gave the finger to the IMF and defaulted on their debt. Argentina now has a small external debt and positive balance of payments. Iceland too reneged on their debt and and maybe Ireland is now regretting that it did not do the same.

The 20% of GDP spent on Defense appears to be high, given that the war is over. Disbanding large segments may seem like a option. However having unemployed soldiers running amok makes disbanding the army a not very viable option. That said it appears the Government has been moving the Defense sector toward commercial ventures. The Thalsevana Resort in Jaffna, The Jetliner Cruises and the boat trips to Adams Bridge are few that I know of firsthand.

So why is it that Dr. Arujuna Sivanathan makes dire predictions for Sri Lankas economy without comparing say to at least the UK where he is domiciled. Yes, the numbers are correct and a comparison with the state of economies of the first world countries would have been fair reporting.

So who is Arujuna Sivanathan. DBS Jeyarajs blog and website introduce him as a former Director at Barclays Capital, the UKs largest investment bank and French bank Societe Generale and that he has extensive experience trading corporate and sovereign bonds and credit derivatives. He also holds a PhD and Masters in economics from the University of Glasgow. However it appears Arujuna Sivanathan is now working for Old Age homes such as Goodcare Ltd.

However, what is not mentioned is that Arujuna Sivananthan is an Executive member of both Conservative Way Forward and British Tamil Conservatives, and a party activist in Greenwich. He has also written articles such as "Arujuna Sivananthan: Sri Lanka must be subject to an independent war crimes inquiry" with statements like
The most heinous atrocity of the 21st Century was committed on the shores of an obscure lagoon eighteen months ago and six thousand miles away. The world was in the dark about it and if not for a few brave British journalists, and thanks to our free press, it would have gone altogether unnoticed.
Sri Lanka must be subject to a regime of punitive economic sanctions if it fails to heed our calls for an independent international inquiry into war crimes. Every bully and despot must understand that there are consequences for those who disregard our call not to crush democracy and human rights under foot. Otherwise, we risk being taken for lightweights and our words will count for nought.
On a BBC website he comments
The comments posted by the editor are unrepresentative as Sinhalese outnumber Tamil comments by a ratio of 5:1. Yet the 500,000 British Tamils outnumber Sinhalese by a similar ratio. The key issues which unite all Tamils behind a candidate is their stance on the suspension of the GSP+ trade concession, and, the prosecution of war crimes against elements in the Sri Lankan military establishment. Candidates who support both will get the Tamil vote in their seat en-masse.
Arjuna Sivananthan, London, UK
So it appears Arujuna Sivanathan is trying to skin the cat by other means. Given that his organizations have not made headway on Independent War Crime Inquiries, maybe he is trying to drum up public opinion on false perceptions of the dire state of Sri Lanka's economy.

Bottom Line: I would read Arujuna Sivanathan's pronouncements on Sri Lanka's economy with a pinch of salt. He has an agenda and an axe to grind and he is using seemingly unbiased articles to achieve his goals.

My comments on an article A Disorderly Depreciation Of The Rupee
Arjuna Sivanathan closes another one of his “scholarly” articles with concern that “The only question which needs to be answered is whether Sri Lanka’s policy makers will remain sufficiently disciplined and ensure that there is no policy slippage under duress from their overwhelming political compulsions”. Really, that much concern for Sri Lanka when in an another life he had an article titled “Sri Lanka must be subject to an independent war crimes inquiry” Arujuna Sivanathan says that “Sri Lanka must be subject to a regime of punitive economic sanctions.

You see, AS portrays himself as unbiased author writing scholarly academic analysis of Sri Lanka. I think the issue of unbiased authorship is self evident from the previous paragraph. Anyway whats a little bias among friends so long as the writing is a scholarly academic analysis. So lets have a look at his scholarly analysis.

AS article about currency devaluation, of which Sri Lanka has expereience about 10% with respect to the US dollar. Maybe I am wrong, would not comparison of Sri Lankan currency devalualtion to a another couple of currencies have made sense. In this day and age these are not too hard to do. Below is a link to a chart/graph Indian Rupee (INR), Euro (EUR) and Sri Lanka Rupee (SLR) with respect to the USD. You know this took me just 5 minutes to create.;CURRENCY:USDEUR&cmptdms=0;0&q=CURRENCY:USDLKR&ntsp=0

Lordy, Lord looks like INR, EUR and SLR have all been been depreciating against the USD. So what could be happening. Maybe Investors having to fill dollar obligations. i.e pay up in USD, margin calls and anticipated CDS (you know the area AS used to work in) payouts. So institutional investors are liquidating their foreign investments and converting to dollars. So they will for example sell their stock in the Indian Stock Exchange (that has been down) and with the INR buy dollars making the INR depreciate.

When I see, Foreign Investors selling all thier property in an disorderly exit from Sri Lanka, that will be day, and I personally will be dancing a little jig.

Anyways whats a little chart/graph or two standing in the way of scholarly analysis among friends. Maybe forgeting to mention that the Fed Reserve article that forms the basis of AS’s analysis was written in 2005. You know the time Roubini (and Raghuram G. Rajan among others) were predicting increase of financial risk with the creation of Credit Derivatives and depreciation of Mortgage Backed Securities. Maybe AS could really have been analytic and used the model described in the Fed Reserve Paper with data on Sri Lanka and compared the results with the 25 odd countries analyzed in the paper.

So may be these articles of AS have not achieved unscaled and unparalleled heights in scholarly analysis. Anway, what matters is that they have been written as AS volunteers by one whose “academic credentials you may at any point contact my PhD supervisor Professor Vito Antonio “Anton” Muscatelli FRSA FRSE AcSS who is the Principal of the University of Glasgow”. Really Arjuna, “ask my Professor”, isnt that a little puerile. Dont you think citing a peer reviwed article of which you may have even been the tenth co-author might have been better. Your Peer reviewed article does not have to be in The Economist or the Quarterly Journal of Economics, even the Bulletin of Indonesian Economic studies would suffice.

It suddenly struck me, maybe AS is not really writing for us donkeys who look at these articles a little critically. AS is writing for like minded people who have his same agenda. This way when goes for those “voluntary political activist” meetings he can raise up his hand and like any armchair warrior proudly roar, I too have worked for the CAUSE …of a “regime of punitive economic sanctions” against Sri Lanka.

Ta, Ta, Arjuna, please keep up the good work. Dont forget to let your PhD supervisor Professor Vito Antonio “Anton” Muscatelli FRSA FRSE AcSS who is the Principal of the University of Glasgow know of the your excellent articles of scholarly anaysis. I am sure he will be delighted to know that he has taught you well.


  1. I did not know of his other connections but I find his pronouncements on the economy sensible.

    Some of the figures that you quote above are misleading. What you need to have is public debt, not external debt. External debt includes the debt of companies, banks and individuals. This does not become a problem for taxpayers, unless there is a government bail out.

    Some explanation is here:

    The public debt is the debt that is borrowed by the Government, which ends up on the tax payer, the UK is 977bn or 62% of GDP.

    Countries such as Greece with unsustainable public debt are indeed in crisis (Spain, Portugal are also at risk), but since Sri Lanka's finances are heading that way I think we may conclude that we are indeed in crisis.

    1. Jack Point, I was well aware that Public Debt and External debt can be different. To quote from External Debt wiki (also has a link to Public Debt by country)

      external debt, the total public and private debt owed to nonresidents repayable in internationally accepted currencies. public debt is the money or credit owed by any level of government, from central to local, and the private debt the money or credit owed by private households or private corporations based in the country under consideration.

      I used External Debt because Arujuna Sivanathan used external debt in his article, and apparently no one quibbled over that metric being used by Arujuna (also please note at bottom).

      When we look at Public Debt to GDP, the US is 102%, UK is 80%, Canada is 84% and Australia 26%. The US and UK also run current account deficits to GDP ratios around the same range (approx 3-5% of GDP) as does Sri Lanka.

      The Manufacturing base of the US and UK is long gone and will take at least a decade to turn around, so earning ones way out by export of manufactured good is not viable to reduce debt. One of the ways the US and UK can reduce the debt is to cut subsidies, which of course is called something else, "Social Safety Net". I think getting rid of the Dole (welfare payments in US), reduced NHS (Medicare, Medicaid in US) will bring about riots on the street. No different from the riots we had in SL a few days back because of increased fuel price.

      Other ways to reduce the debt of the US and UK would be to sell of assets (See Net Debt) and that would still leave a debt of around 70% GDP. The other obvious way would be to devalue their currency as their debt is denominated in their own Sovereign currency.

      I agree there is a financial crisis, but that seems to be affecting the whole world (please also see Global Debt Clock). So when someone like Arujuna Sivanathan who advocates that "Sri Lanka must be subject to a regime of punitive economic sanctions" pontificates on the economy, I doubt that he has the best interests of Sri Lanka at heart. Thats when I do my own research and comparisons of Sri Lanka's economy to the economies of the West.

      note: Both the Public Debt wiki and Global Debt Clock list Sri Lankas Public Debt at 80%. From the SL Central Bank Special Appendix pg. 7 it is apparent that the 80% includes domestic public debt. Domestic Public debt, including Treasury Bonds and Rupee Loans is LKR 2,566 billion (USD 23 billion) or 45.8% of GDP. Foreign Public debt including Rupee denominated Treasury Bills and Bonds to foreign investors is LKR 2,025 billion (USD 18 billion) or 36.1% of GDP. So every man woman and child owes about USD 900 to foreign debtors. Not too bad compared to the UK and US.

  2. See also:

    Its old but adds perspective.

    Sri Lanka went through this crisis in 1999 and 2008 so it is not new.

  3. "Compared to the US and UK every man woman and child in Sri Lanka only owes about USD 900 or roughly a One lakh of Rupees. When viewed in this context, Sri Lankas finances do not appear to be all that dire."

    You need to compare income to debt (this is why the debt/gdp ratio is used). Debt in absolute terms does not mean much, it is in relation to capacity to repay (or in relation to size of the economy ie GDP) that it becomes meaningful.

    1. Jack Point,
      I think that I have demonstrated that regardless of whether External debt or Public debt is used Sri Lanka appears financially no worse (or maybe even better) than the US or UK.

      It is possible that I am using the wrong metric and if I am shown the numbers to prove that SL is financially worse off than the US or UK I will stand corrected.

      My opinion is that this is a global crisis and it is a "beggar thy neighbor: approach to solving the issues.

    2. In Sri Lanka's case, since the capital account is virtually closed almost the entirety of the external debt is in fact public debt.

      I think your figures are a bit high, for the UK,

      Some differences with the UK & US and Sri Lanka
      1. The public debt in those countries has shot up recently because of the bailouts. UK debt was around 40% prior to the crisis.
      2. They have already achieved a high standard of living. Even if they stagnate or decline, it is from a high base. We are still poor.
      3. The public debt, apart from the bailouts has funded for the most part infrastructure and services of value. In SL it is being used to fund interest repayments, pay salaries (for which very little is delivered). What infrastructure has built gone to the pockets of cronies in building white elephants.