- US $ 5bn in sovereign bonds settlements due from 2019 to 2022
- SL will have to borrow consecutively for three years to roll-over debt from 2019
- Trouble in the interim if country fails to put its macro-economic house in order
- Economists warn country is heading for a debt trap
Despite the 3-year engagement with the International Monetary Fund (IMF) is expected to act as a confidence booster and open up market access to Sri Lanka to tap international capital markets, a top economist said that the country has no headroom for further external borrowings during the next two years.
According to Dr. Dushni Weerakoon, Deputy Director at the Institute of Policy Studies, an economic policy think tank, Sri Lanka has already maxed out on its credit card to the extent that the country’s external debt sustainability matrices have no room for further weakening.
“There is further no room for Sri Lanka to see a further weakening in external debt ratios,” Dr. Weerakoon said.
Dr. Weerakoon’s warning comes at a time when the country has to get ready for either to retire or roll-over as much as US $ 5.0 billion worth of sovereign bond obligations that it has to honour every year for a period of three years, starting
Speaking on the topic ‘Sri Lanka’s debt sustainability’ at the Sri Lanka Economic Association annual sessions held during the weekend, she said the country had been running out of its options to borrow externally for Balance of Payment (BoP) and fiscal support as it had been doing in the recent past.
Sri Lanka nevertheless raised US $ 3.6 billion in 2015 and 2016 from international sovereign bond issuances for BoP and fiscal support and also to settle government borrowings.
This is beside the US $ 1.5 billion secured from the IMF in June this year under its 3-year Extended Fund Facility (EFF) to bail out the economy from a BoP crisis. The disbursements of this facility would occur in seven equal tranches through the full tenor.
“But that option of providing external borrowings for balance payment (support) and fiscal support, I don’t think is a luxury that we can afford for the simple reason that from 2019 onwards all or most of our International Sovereign Bonds (ISBs) are bunching up for settlement,” she remarked.
Sri Lanka’s debt-to-GDP ratio, widely used debt ratio to gauge the risk of debt posed to a country’s economy, rose to 76 percent by the end of 2015. The total external debt-to-GDP has also risen to 54 percent as private corporates and state-affiliated entities were encouraged to borrow externally from 2011 onwards.
Further more than 90 percent of the government’s revenues evaporate for annual debt servicing compelling the country to borrow even for its day-to-day expenses, a situation akin to a bankrupt establishment.
It was only last week Dr. W. A. Wijewardena, a former Central Bank Deputy Governor and a respected economist said the country was moving towards a debt trap.
Sri Lanka’s debt-to-GDP ratio is above the 30-60 percent level of benchmark prudential limit set for developing countries by the IMF.
The corresponding threshold for developed countries was set between 60-80 percent level as such countries were considered to have better economic policies and could withstand shocks should they occur. While the maturity profile of the country’s public debt has improved, significant growth in contingent liabilities have not been encapsulated as a part of public debt outstanding.
Further the actual amount of state-owned enterprise debt is also not clear, which together could further raise the total public debt above what is already recorded.
Since the country migrated into the level of lower middle income earning country, the access to concessional funding has dried up and as a result the share of non-concessional debt of the total debt stock has risen to 50 percent.
Further the debt-to-export ratio for Sri Lanka stood as high as 265 percent when the threshold for low income countries was at 150 percent under the IMF’s Debt Sustainability Analysis (DSA) for Market-Access Countries (MAC) conducted in 2009.
However, following the most recent DSA conducted in 2016, the IMF concluded Sri Lanka’s external debt remained sustainable despite the fact that her external position was weaker than implied by fundamentals and desirable policies.
Yet the IMF’s opinion on Sri Lanka’s external debt sustainability was contingent on an economic growth of 5 percent to 5.5 percent, over 7 percent growth in exports and 1.2 percent to 2.8 percent of net non-debt creating capital flows steadily within the five years up to 2021.
According to economists, achieving of all of these together could be highly challenging.
Furthermore the debt servicing payments-to-exports ratio for Sri Lanka has also risen steadily to 27.7 percent in 2015 when the upper range target set was only 20 percent under the Heavily Indebted Poor Countries (HIPC) framework.
These debt sustainability matrices point to extremely challenging circumstances for Sri Lanka in raising further external debt.
However Dr. Weerakoon said Sri Lanka would have no choice but to tap the international capital markets consecutively for three years starting from 2019 onwards to roll-over the maturing sovereign bonds.
“We don’t have flexibility in deciding when we go. If conditions are bad we can’t say we will postpone for next year.
International rating agencies are well aware of the fact that Sri Lanka’s options are very limited, that we have to come to the market in order to roll-over these ISBs,” she noted in a precautionary tone.
Therefore she said the country had no room for complacency and therefore would have to put its macro-economic house in order, improve both the foreign direct investments and exports during 2017 and 2018 to prepare itself to access the market at a reasonable cost.
“It’s very unlikely that in another two years, we would have saved enough foreign exchange of US $ 5 billion to start settling these ISBs.
So, if Sri Lanka does not get the macro-economic policies right in the next two years, exports do not turn around and FDIs starts flowing in, then we will be in some trouble in the interim.
If not, the country will have to pay a high risk premium,” she cautioned.