Sri Lanka auditor general drops debt to GDP bombshell

ECONOMYNEXT – Sri Lanka’s debt to gross domestic product ration is over 87 percent of gross domestic product and not 82.9 percent as claimed by the finance ministry, due to non-recognition of several liabilities, the island’s auditor general has said.

Sri Lanka’s central government debt increased to 11,977 billion rupees by end 2018, from 10,313 billion rupees, or 16.14 percent, despite having a much smaller budget deficit due to currency depreciation according the finance ministry data.

Sri Lanka operates a peg with the US dollar and breaks it often by printing money to trigger unsustainable credit growth generating currency collapses. Credit is now weak and the central bank can appreciate the currency if it wants analysts have said.

Analysts have called for reform of the central bank to end or reduce monetary instability.

The International Monetary Fund has estimated central government debt at 83.3 percent of. Its own debt to Sri Lanka’s central bank is 1.3 percent of GDP.

But Sri Lanka’s Auditor General said the central bank debt was 12,461 billion rupees, or 87.75 percent of GDP. The AG completely disclaimed the Treasury’s accounts 2016, over window dressing activities that began many years earlier, but he now only qualifying them on the bais of debt and other matters, which are still outstanding.

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Foreign loans of 366 billion rupees for which the government was responsible, bank overdrafts and printed money of 199 billion rupees given by the central bank were not captured in the debt, the AG said.





In addition there was an unrecognized 344 billion rupees on the face value of Treasury bonds.

The AG said Treasuries should be recognized at face value not the actual value sold.

The AG had raised the matter earlier, and the Treasury had started to recognize bonds at face value after 2016. But debt in earlier years were still understated, 344 billion rupees, indicating that more bonds had been sold at a discount than a premium.

When bonds are sold at a discount, annual interest payments are lower but a bigger lump sum has to be paid as cashflow in the final year when the bonds are settled.

It is not clear whether Sri Lanka had deliberately issued debt at a discount in the past to understand the liability or whether it was unintended. By having coupons close to market rates, the gap can be reduced. Sri Lanka also has multiple price auctions.

The AG also found other problems in the debt, including contingent liabilities which were actual liabilities and loans from commercial banks and foreign loans that were not accounted for, which have not been resolved for several year.

The AG used a 14,200 billion rupee GDP to calculate the number, but the final GDP had been estimated at 14,450 in central bank data, which also corresponded to the Treasury figure.

A higher nominal GDP will tend to reduce the debt to GDP ratio. (Colombo/June07/2019 – Update II)

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