Despite the money market interest rates showing some easing in recent times with the return of foreign investments to the government securities market, an independent analyst opined that it cannot be sustained given the larger debt maturities coming up next year and higher government borrowings from the domestic market, which will push the interest rates by early next year.
The situation could get further exacerbated due to possible outflows of foreign funds, he added.
According to Capital Alliance Chief Strategist Purasisi Jinadasa, the cost of government borrowings has continuously risen in recent times and there is no reason for it to come down because the government will have to depend more on domestic market borrowings for its funding needs.
He said it could not be expected for the government to put its fiscal house in order within a short period of time.
According to the data compiled by Jinadasa, the government’s new borrowings, both foreign and local, in 2015, have amounted to US $ 5.7 billion with a weighted average cost of 7.1 percent.
However, he said during the first eight months alone the government in total has borrowed US $ 11.6 billion, of which the weighted average cost has risen by 230 basis points to 9.4 percent.
“Next year, it has to be either at these levels or higher,” Jinadasa remarked.
Central Bank Governor Dr. Indrajit Coomaraswamy recently said there wouldn’t be any more foreign borrowings during the remainder of 2016, meaning leaning more towards the domestic market to meet the government’s funding needs.
However, he did not rule out accessing the international capital market more than one time from next year to roll over the government debt.
Meanwhile, Softlogic Stockbrokers Chief Operating Officer and Head of Research Danushka Samarasinghe said he expects the interest rates to remain at the current levels at least for the next nine months.
Even though the private credit growth remains still strong “due to the underlying economy remaining vibrant”, Samarasinghe said it could come down because there is a transmission lag in the monetary policy actions to trickle down into the real economy.
He further said that as the Sri Lankans have long been used for very high interest rates, particularly before the end of the conflict, they show some level of stubbornness in reacting to high rates in short time.
However, both Jinadasa and Samarasinghe ruled out the possibility of another round of key policy rate hike by the Central Bank during the remainder of this year.
Sri Lanka tightened its monetary policy for the third time in July in order to curb private credit growth and to keep inflation in check.