ECONOMYNEXT – Sri Lanka’s debt to gross domestic product including guaranteed debt of state enterprises were down to 106.04 percent by end June 2023, official data shows.
Sri Lanka’s central government debt was 27,148 billion rupees by end June 2023, and SOE guaranteed debt was another 1,095 billion rupees, taking the total to 28,244 billion rupees, according to a June debt update.
Sri Lanka’s rolling GDP in the four quarters up to was 26,636 billion rupees, based on the latest calculations of the statistics office.
Sri Lanka’s central bank also had another 4.996 billion US dollars in gross debt which is used in International Monetary Fund debt calculations.
However, the debt is balanced by a large Treasury bill stock worth almost 10 billion US dollars at the June exchange rate of 308 rupees by June.
As long as monetary stability is maintained, the central bank can exchange the debt for US dollars and pay the debt down without any increase in government debt.
In the current currency crisis, the central bank also borrowed from India through deferred the Asian Clearing Union
Though holding an exchange rate, and building reserves (the monetary authority takes in dollar deposits) is a simple matter for an Asian country with a 20 percent savings rate, unstable central banks in the region print money to target a call money rate or other interest rates and trigger monetary instability, when private credit picks up, destroying currencies.
The problem is then blamed on a variety of real economy phenomena by inflationists, among the favourites are lack of an export oriented economy, budget deficit and current account deficit.
Sri Lanka’s rupee has since depreciated to around 320 to the US dollar, under an ad hoc peg arrangement called a ‘flexible exchange’ found in countries with central banks that go to the IMF frequently after mis-targeting rates and triggering external crises.
The depreciation will expand dollar debt.
The IMF also counts among gross debt a swap from China taken by the central bank which has not been spent.
Sri Lanka has passed a new central bank law, legalizing the unstable peg arrangement backed by inconsistent policy, which is neither a clean float nor a hard peg.
The law has also legalized flexible inflation targeting with output gap targeting (printing money for macro-economic policy or growth with easy money) , the exact strategy that led to forex shortages, growth shocks from stabilization policies and rising foreign borrowings from around 2015.
Flexible inflation targeting is also found in recently defaulted countries. (Colombo/Sept18/2023 – Corrected. An earlier version of this story said said total of central govt and SOE debt was 100.34 -pct of GDP)