ECONOMYNEXT – Sri Lanka’s central government debt fell to 99.83 percent of gross domestic product by June 2024 from 105.49 percent in December, amid exchange rate stability, a reduced budget deficit, and an expanding economy, official data show.
Public debt with guaranteed debt of state enterprises fell to 105.7 percent of GDP in June 2024, down from 112.74 percent in December 2023.
Rolling GDP to June went up to 28,909 billion rupees, from 27,629 in December 2023.
Guaranteed debt includes a credit to the Reserve Bank of India which the central bank is paying down.
When central banks use proceeds of swaps or other debt, it prints money to keep policy rates down and acquires government debt in the process (to sterilize the intervention by running inflationary policy), driving credit and imports.
As a result, central bank dollar borrowings or reserves which are spent to finance private imports, are fully backed with government debt which have already been issued.
When the central bank buys dollars by selling the securities to the banking system and repays the external debt, there is no change in total government domestic debt, but the external debt of the agency falls.
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Meanwhile the central bank itself may make profits from the interest coupons on its debt, which is an expense of the budget.
Public debt and guaranteed debt without guaranteed central bank loans to India fell to 103.6 percent of GDP in June 2024, from 109.86 percent of GDP in December.
Meanwhile, external debt in rupee terms also fell to 11,409 billion rupees (about 39.5 percent of GDP) in June 2024 from 12,094 billion rupees in December 2024, according to a June debt bulletin issued by the Finance Ministry.
Foreign debt was helped by exchange rate appreciation. Sri Lanka also repays multilateral debt.
June foreign debt includes some capitalized interest from China Development Bank. Restructuring balance debt, which may increase the capital will lead to a lower interest bill.
When the central bank doesn’t run inflationary policy (does not enforce rate cuts with open market operations), the government can easily settle maturing foreign debt installments by converting rupee borrowings or taxes into dollars.
The government has taken on debt of the CPC which was previously guaranteed. The CPC borrowed dollars as the central bank ran inflationary policy to cut rates claiming inflation was low under so-called data driven monetary policy, critics have said.
At the moment, the central bank is operating deflationary policy.
Meanwhile, domestic debt expanded to 17,456 billion rupees in June 2024, from 17,052 billion amid a budget deficit.
The budget deficit has also been reduced with interest costs falling and non-interest costs (primary spending) also being kept in check.
When there is monetary stability, interest rates tend to fall.
Sri Lanka has high nominal rates due to a flawed domestic anchor (5 to 7 percent inflation target) which conflicts with a foreign reserve target, triggering forex shortages, critics have shown.
Sri Lanka’s budgets, inflation and interest rates went out of control in the 1980s as the country lost a credible anchor for money after the International Monetary Fund’s Second Amendment to its articles.
While advanced countries with clean floats emerged from Great Inflation in the 1980s, Sri Lanka suffered inflation and rates higher than the Great Inflation period.
Amid deflationary monetary policy and confidence in economic policies Sri Lanka’s interest rates have fallen from 2022 and 2023 highs.
However political parties in the current Presidential Elections are promising both subsidy increases and tax cuts.
Interest rates have already started to go up. In the past the central bank has printed money to suppress the rate including by purchasing bonds violating a bills only policy, under its ‘instrument independence’ triggering external crises after a 30-year war ended.
(Colombo/Aug17/2024)