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Sri Lanka among countries with rising interest burdens: IMF

ECONOMYNEXT – Sri Lanka is among countries having high levels of commercial debt with rising interest burdens that are vulnerable to rollover risks, according to the International Monetary Fund.

It was among countries that faced tighter financing conditions and rising risk premiums last year.

“Many economies saw rising interest burdens, which exceeded 20 percent of total revenue in 2018 in Egypt, Pakistan, and Sri Lanka,” the IMF said in its latest Fiscal Monitor report.

“As a result, emerging market economies have become vulnerable to rollover risks if they face large financing needs.”

According to the IMF, Sri Lanka’s maturing debt in 2019 is 13.5 percent of gross domestic product, falling to 12 percent in 2020.

The island’s total financing need is 18.1 percent of GDP this year, falling to 15.5 percent next year.

The IMF said that removal of tax exemptions, in countries like Argentina, China, Sri Lanka, and Turkey, and improving administrative efficiency would yield more revenue for priority initiatives.

At a subsequent news conference, Anna Ilyina, Division Chief, Monetary and Capital Markets Department of the IMF, said countries should tackle high debt burdens through a comprehensive set of measures.

These include “a careful monitoring of debt vulnerabilities, improved [debt] data transparency, and increased debt management capacity,” she said in response to a question on the rollover risks faced by some of the developing nations, like Sri Lanka.

“Looking across low‑income and developing countries, we can see that public debt levels have increased significantly in recent years in many of those countries,” Ilyina said.

“In fact, the median level of debt is now close to 50 percent of GDP. And the number of countries that are now either at high risk of debt distress or are already in debt distress is high. It is over 40 percent.

“And that is a significant increase, compared to only five years ago, when it was only 20 percent. So these issues are very much on the minds of policymakers in those countries.”

Ilyina said that the problem arose after many of the countries have increased their reliance on market financing with relatively favorable external borrowing conditions.

“And with that, of course, comes the downside; that their debt service costs may increase when interest rates go up. Also, in some cases, that involved a shortening of maturities. And all of those things lead to a higher sensitivity to interest rate and rollover risks.”

Tobias Adrian, Financial Counselor and Director, Monetary and Capital Markets Department, said that in many frontier markets, the IMF sees that the share of debt that is not conforming to the Paris Club standards is on the rise.

“And that means that if there is any debt restructuring down the road one day, that can be very unfavorable to those countries. So the borrowing terms, the covenants, are extremely important. And we do see a deterioration in that dimension.”

The Paris Club is a voluntary, informal group of creditor nations that provides debt relief to developing countries, either by agreeing to renegotiate or reduce official debt owed to them on a case-by-case basis.

China, which has emerged as one of the biggest lenders to Sri Lanka, is not a member of the Paris Club.
(COLOMBO, April 11, 2019-SB)

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