Sri Lanka can service external debt, domestic to foreign loan ratio improved: Cabraal

ECONOMYNEXT – Sri Lanka has the ability to repay foreign debt and the ratio of domestic to foreign debt is now more favourable, State Minister for money and capital markets, Nivard Cabraal said amid downgrades and a sell-off of the island’s dollar sovereign debt.

“Sri Lanka is justifiably proud of its immaculate debt service record, without a single default,” Cabraal said.

“It would also be noted that Sri Lanka has experienced similar challenging circumstances previously, with high levels of debt.”

Sri Lanka’s national debt to domestic product ratio has reached 100 percent in 2001, but the country later brought it down to mid 70s with by end 2014 with “decisive and innovative action”, he said.

The spiked in 2001 after the rupee collapsed and the economy contracted, pushing the deficit up.

Meanwhile Cabraal said the domestic to foreign debt ratio which was 51:49 at the end of 2019 had improved to 56:44.

“It is therefore clear that the Government’s commitment and support towards better debt management, both directly and indirectly, has already started to take effect,” he said.

The central bank has bought 300 million dollars from foreign exchange markets in 2020, he said.

Sri Lanka’s rupee fell steeply in March as the rupee was not defended after money was printed amid strong private credit growth.

But private credit has since fallen, though the government borrowings went up, reducing pressure on forex markets.

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More money was also printed and excess liquidity had climbed, and foreign reserves were used to settle debt with the central bank acquiring domestic debt.

Sri Lanka forex reserves were close to 6 billion US dollars after settling a billion dollar maturing sovereign bond in October.

Sri Lanka was also in talks for a 700 million dollar credit from China Development Bank whose interest rate and terms of payments would be better than the repaid bond, Cabraal said.

The full statement is reproduced below:

State Minister Cabraal dispels undue fears on Sri Lanka’s debt service capacity

Following is a statement issued by the State Minister of Money & Capital Markets and State Enterprise Reforms Ajith Nivard Cabraal on 30th October 2020

With the spread of the COVID-19 pandemic, all countries including Sri Lanka, observed a contraction in economic activity, reduction in foreign exchange earnings, decrease in revenue collection, and increase in health and welfare related expenditure. However, the promptand measured policy support provided by the Government and the Central Bank enabled Sri Lanka to contain the unfavourable effects of Covid-19 to a great extent, and return the economy to near-normalcy by mid-May 2020. In fact, most economic activities have displayed a notable revival from May onwards, and this recovery is on-going. The recent detection of a new Covid cluster is now being decisively addressed by the Government, and this wave is also expected to be short-lived. Accordingly, the expansion of the fiscal deficit and the increase in debt levels in 2020, should not be generalised as a prolonged debt distress, but rather as a “one-off” deviation from the clear fiscal consolidation path that has been well articulated in the new Government’s policy framework.

The election of a new President in mid November 2019 and the formation of a single-party Government with a sizable majorityin August 2020, has enable the new Government to address the uncertainties in the political and policy spheres observed during the period 2015 to 2019. Consequently, Sri Lanka has been able to address public health concerns swiftly, as well as take difficult economic decisions with greater confidence. For example, when the Government was of the view that it was necessary to conserve forex, given the likelihood of low foreign exchange earnings due to the pandemic, and the need to prioritize foreign debt service obligations, the Sri Lankan authorities imposed restrictions on non-essential imports from March 2020.Such decisiveand bold action, along with the reduction in global petroleum prices, resulted in a substantial saving of nearly US$ 3 billion in terms of expenditure on merchandise imports in the first nine months of the year, compared to the same period of the previous year. This saving, along with the better-than-expected outcomes in terms of merchandise exports, services exports other than tourism, and workers’ remittances, is now projected to compress the external current account deficit to below 1.5% of GDP in 2020.

It would also be noted that capital flows and official reserves were also affected during the early months of the global outbreak of Covid-19. However, growing business confidence due to decisive action by the Government and the Central Bankhas enabled the country to stabilize the exchange rate with only a marginal depreciation of around 1.5%so far this year, even while the Central Bank was able to purchase/absorb US$ 300 million from the domestic foreign exchange market during the year. As a result, official reserves remain close to US$ 6 billion, aftersettling foreign debt service repayments of around US$ 4 billion thus far during the year, including the repayment of the matured International Sovereign Bond of US$ 1 billion in October 2020. In the meantime, it would be further noted that the Sri Lankan authorities are presently negotiating a loan of USD 700 million from the China Development Bank which is expected to be at an interest rate and terms of repayment that are significantly more favourable than the USD 1 billion Sovereign Bond that was just re-paid. In addition, an attractive, exchange rate risk-free, Forex SWAP facility has been introduced for any foreign investor who invests in Sri Lankan government securities, which is expected to boost foreign exchange inflows particularly from the Middle-East, in the period ahead.

In terms of growth performance, Sri Lanka is once again set to embark on a growth path, following the setback in the first half of 2020 caused by the pandemic. The formulation of the new Government Cabinet and State Ministerial structure, with clear performance indicatorshas been geared towards improving the efficiency and effectiveness of the economy. These new governance structures are bound to enhance agriculture and agro-based and mineral-based industries, increase export opportunities, as well as facilitate large projects within the Port City, Hambantota Port, and dedicated industrial zones. Theexpected revitalization of state owned enterprises,together with the private sector-led growth projects would alsorevert the Sri Lankan economy to the high growth path that was observed prior to 2015whereby annual growth rates of over 6.5% were regularly recorded.

In the meantime, Sri Lanka’s entire local debt stock of about Rs. 7.7 trillion (USD 42 billion)as at end July 2020 is being rolled-over and re-priced now at interest rates which are almost half of what was paid in 2019, while the Rupee remains stable. It may also be noted that a new trend has been established where greater reliance is being placed on domestic financing, and that strategy has already improved the “domestic: foreign” ratio of the debt from 51:49 at end 2019 to 56:44 now, which trend the authorities are keen to improve further in the period ahead. It is therefore clear that the Government’s commitment and supporttowards better debt management,both directly and indirectly, has already started to take effect.

Sri Lanka is justifiably proud of its immaculate debt service record, without a single default. It would also be noted that Sri Lanka has experienced similar challenging circumstances previously, with high levels of debt. For instance, during 2001-2004, the country’s debt to GDP ratio was well over 100%, and by end 2005, it was at 91%. Nevertheless, Sri Lanka was able to gradually reduce the debt to GDP ratio to just 72% by end 2014 through decisive and innovative action.

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