Sri Lanka's rulers frequently talk of the 'government bearing the burden' and increase current expenses. No mention is made that the state is financed by taxes, by borrowings which push interest rates up, or by money printing, which leads to inflation.
"Political aversion to taxation and short sighted and flippant spending meant large deficits without any corresponding build up of assets, physical, human or financial, that in turn could have increased revenues, and created a virtuous cycle," Chanaka Wickramasuriya, head of Fitch Ratings Sri Lanka said.
Sri Lanka's national debt has risen from 16.9 percent of gross domestic product in 1950, shortly after the country got independence from British rule, to over 108.9 percent in 1989.
Since then the national debt has fallen largely with inflationary nominal growth of the economy, despite continued deficit spending. In 2008, the national debt was 80.1 percent of gross domestic product.
"Large and endemic primary account deficits meant inflation, which in turn discouraged savings to begin with," Wickramasuriya said."Vacillating primary account deficits meant volatile interest rates, further hampering any viable termed out structure of savings, of whatever savings were generated."
He was addressing senior executives at the 05th LBR-LBO Chief Financial Officer forum on 'Developing a vibrant corporate debt market: issues and challenges' in Colombo.
Sri Lanka's state has the tools to destablize the economy very quickly, especially by mis-using loopholes in the central bank law to monetize the deficit.
Sri Lanka's inflation can shoot up from low single digits to over 20 percent in less than a year. Risk free yields can also fluctuate from 8.0 percent to 20.0 percent in a few years. Import taxes can change literally overnight with no parliamentary debate.
In so-called 'developed' nations, governments are limited by constitutions that guarantee liberties and equality to the people and strong institutions that protect the economic and other freedoms, giving them the freedom and space to flourish.
This creates a steady and predictable rule of law preventing arbitrary government actions that suddenly destabilize markets.
In particular the state has tools that can manipulate credit markets and impose severe financial repression, which later backfire on the people.
To escape extreme volatility that comes from state action, analysts say saves have skewed markets towards the short end, where people had the freedom to do so.
Short term animal
Wickramasuriya says private and corporate savings behavior looked to re-price savings to cope with the volatility in inflation and interest rates driving the market towards the short term.
Over the years Sri Lanka has built a system where people's savings, especially by non-state workers, are channeled towards deficit spending.
Forced savings schemes for private sector workers, like the Employees' Provident Fund, and the Employees' Trust Fund were geared toward deficit financing.
There has been growing unhappiness at the way the EPF is managed. There have been calls for an independent commission to manage the fund, taking it out of state control.
Wickramasuriya says private savings and forced savings "behaved like two very different animals."
"Outside these two, the insurance sectors’ investments were also governed by regulatory restrictions, again directed toward deficit financing," he said.
Sri Lanka's largest three banks are also state owned. The National Savings Bank has put the bulk of its assets in government securities. Some money has gone to the housing market in recent years.
Half the assets of the country's largest commercial bank, the Bank of Ceylon has also gone to the state.
A few old private companies have their own pension funds. Others are not allowed to set up their own funds.
"Our economy is small and our funding structure, the supply side is crowded out by government deficit financing and that is a typical developing country or emerging market scenario," Ravi Abeysuriya of the Hayleys group said.
The state hold over savings markets has allowed severe financial repression to be practiced, with savers sometimes getting rates far below inflation.
In countries like Malaysia both private and public pay taxes, which improves the government revenues and cuts down on deficit.
Tax equity in democratic countries contributes to equality before the law and prevents feudal discriminatory privileges being awarded to the ruling classes.
But in Sri Lanka state workers including politicians do not pay income taxes on their salaries or pensions. The EPF on the other hand is taxed, without regard to the balance of even the most poorly paid private sector worker.
Wikramasuriya says Malaysia's then prime minister, Mahathir Mohamed channeled savings to bond markets, which then went to develop infrastructure.
"Mahathir had the benefit of a high savings rate, why? Because even public sector paid taxes, public sector contributed to the pensions fund and he had a more disciplined fiscal regime," Wickramasuriya said.
"We on the other hand don't have the savings rate to invest on these instruments and follow this fast track approach. So we need to fast track the fast track."
Malaysia's large national savings come with the help of savings in the state sector. In 2008 for example Malaysia's national savings rate was 37.9 percent of gross national product. Private savings were 26.6 percent.
In 2008 Sri Lanka's private savings rate was 16.1 percent of gross domestic product. The government was a negative 2.0 percent net spender, pushing down the national savings rate to just 1.4 percent.
In Malaysia a large part of the public savings comes from state enterprise profits.
The total Malaysian public sector was in surplus by 11.2 percent of gross national product in 2009 when the balances of 40 non-financial public sector enterprises, including an oil firm, were included.
Singapore which does not have oil, also has highly profitable enterprises, which contribute to the national budget.
In Sri Lanka most public sector enterprises which make large losses are used to finance subsidies outside the general budget by rulers or to give jobs to party supporters.