Sri Lanka will find it very difficult to borrow from abroad in the future due to the Fed’s stimulus tapering that is likely to happen sooner or later, which will pull back the excess liquidity in the global economy, according to a senior economist in the country.
The situation will further be apparent given Sri Lanka’s Central Bank’s less accommodative monitory policy, which will have to be adopted going forward. “This means the terms which we can borrow abroad will get tightened. So, the terms on which we borrowed over the last two, three years will not be available,” Dr. Indrajith Coomaraswamy told a recent forum.
Post-conflict Sri Lanka has been borrowing heavily from overseas capital markets to fund the domestic growth activities and the most recent being the US $ 750 million debt issue by National Savings Bank at 8.875 percent, a relatively high interest rate for a dollar bond.
Sri Lanka is likely to issue its sixth sovereign bond next year.
Speaking at the recent LBR LBO Summit Coomaraswamy said in this backdrop, Sri Lanka would be more vulnerable as the current account deficit in the balance of payments (BoP) remains very high.
“On top of that, the countries which will be more vulnerable are the countries whose current account deficits of the BoPs are relatively weak. And there Sri Lanka does have an issue,” he cautioned.
Despite Sri Lankan authorities are cherishing the 79 percent debt to gross domestic product (GDP) (which came down from 102 percent a decade ago), Coomaraswamy said the debt burden of 79 percent is much higher than when the levels were at 102 percent.
“The composition of debt has significantly changed. Therefore, the burden of servicing 79 percent of the GDP is higher than the burden of servicing the 102 percent debt,” he said.
Coomaraswamy, who is also the former Director of t he Commonwealth Secretariat Economic Division, illustrated that the medium level of debt of peer countries, which has the same credit rating level, is only 45 percent.
Meanwhile, IMF Resident Representative in Colombo Dr. Koshy Mathai joining in the panel discussion said, while debt is useful in directing resources from less productive opportunities to more productive opportunities, it has to be watched very carefully.
“And there is no doubt that Sri Lanka’s debt is high. Compared to other emerging markets, we have a very high debt ratio. That’s indisputable,” said Mathai, while affirming that Sri Lanka is not in a debt crisis.