Sri Lanka’s total outstanding public debt has risen by little over a trillion rupees during the first six months of 2020 as the government ramped up borrowing to fend off the effects of coronavirus on the economy.
According to the latest Finance Ministry data, Sri Lanka’s total outstanding government debt for the first half of 2020 was reported at Rs.14.1 trillion, up from
Rs.13.0 trillion by the end of 2019.
During this period the government has disproportionately leaned on domestic financing for its funding needs as Rs.882.5 billion was raised via Treasury bills and bonds and other rupee loans.
This is in comparison to the Rs.463.4 billion raised through domestic sources in the corresponding period in 2019.
The government relied heavily on domestic borrowings mainly due to lower costs resulted from aggressive monetary policy easing by the Central Bank and also due to the impaired access to foreign financing sources.
In fact, foreign financing recorded a net repayment of Rs.146.8 billion during the first half of the year compared to a net borrowing of Rs.58.3 billion in the corresponding period in 2019.
As a result, the total outstanding domestic debt increased by 13.6 percent during the first half to Rs.7, 530.8 billion while the rupee value of the total outstanding foreign debt increased by 1.9 percent to Rs.6, 521.4 billion.
Economic analysts opine that the government’s ability to borrow and enhanced room to increase borrowings are crucial during times of emergency to keep the economy afloat when the private sector could not perform its normal
course of functions.
Although the economy is set to contract sharply in the second quarter, the decline would have been much worse had it not been for the fiscal stimulus, which propped up household incomes through handouts and, other state spending on myriad of areas of the economy. Even during the worst of the pandemic, money circulation ran fairly high, as money supply measured by M2b was 13 to 14 percent, the Central Bank data showed.
Even when private sector credit faltered, the government continued to borrow, helping to keep public spending stronger, the data showed.
Meanwhile, Sri Lanka’s current public debt is estimated at 93 percent of the gross domestic product. Although remaining at elevated levels, economists do not see higher public debt as necessarily a bad thing as long as the average cost of such debt remains low and such debt is raised to generate medium to long-term returns in excess of the
cost of such debt.
However, soaring debt levels for protracted periods even at lower cost could become totally unsustainable as they eat up a larger slice of the State budget. Larger the debt grows, the more it becomes sensitive even for the smallest shift in the interest rates, and is likely to crowd out private sector investments.
State Minister of Finance, Capital Market Development and Public Enterprise Reforms Ajith Nivard Cabraal recently said the government would introduce debt management criteria on the premise of three pillars consisting of reduction of debt burden, extension of repayment period and lowering debt servicing cost.
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