March 20, 2023
2 mins read

Lanka’s debt burden continues to soar

The government was responsible for an additional 5.62 per cent of the guaranteed debt held by state-owned businesses, bringing the total to 125.7 per cent of GDP….reports Asian Lite News

The Sri Lankan government’s debt has risen to 115.2 per cent of Gross Domestic Product (GDP) by the end of 2022 from 104.5 per cent a year earlier, according to the latest national account estimates by the island’s statistics office, reported The Island.

A report in an English daily in Sri Lanka read that the gross debt of Sri Lanka’s central bank was roughly 4.66 per cent of GDP. Moreover, the central bank used special drawing privileges that required interest payments. Nonetheless, as long as domestic credit is mild and forex issues are not re-started under flexible inflation targeting, the central bank maintains government rupee Treasury bills that can be sold for dollars to rebuild reserves and service the external debt.

In addition, the government was responsible for an additional 5.62 per cent of the guaranteed debt held by state-owned businesses, bringing the total to 125.7 per cent of GDP.

In a classic Latin American style “inflationary blow off,” Sri Lanka’s nominal GDP surged from 16.8 trillion rupees in 2021 to 24.1 trillion rupees in 2022, increasing nominal tax receipts and lowering the rupee debt to GDP ratio, The Island reported.

Despite additional debt being borrowed to cover deficits, as a result of High Inflation and Financial Repression (IFR), central government rupee debt decreased from 66 per cent in 2021 to 55 per cent in 2022.

Since there is no deadline for domestic debt restructuring under the International Monitory Fund (IMF) debt resolution framework, Sri Lanka’s domestic interest rates are now hovering between 20 and 30 per cent.

Surprisingly, domestic creditors are likely to continue providing the government with funding as “senior creditors” despite the possibility of default. Notwithstanding the rupee’s decline and the suspension of the majority of fresh disbursements, the central government’s foreign debt increased from 39 per cent to 61 per cent of GDP, according to The Island.

The World Bank and Asian Development Bank (ADB), two additional so-called senior creditors whose debt is not restructured, have reallocated approved financing to support urgent and humanitarian needs in 2022.

Grants were given by the US, Japan, numerous European nations, China, and India that won’t add to the debt.

Sri Lanka’s rupee strengthened in March 2022 as domestic credit and consumption were moderated, but it dropped back as a result of an ad hoc peg when central bank purchases looked to have exceeded the excess dollars generated by credit developments, The Island reported. (ANI)

ALSO READ: IMF to approve $2.9 bn bailout package for Lanka

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