ECONOMYNEXT – Sri Lanka’s central government rupee debt has shrunk 35 percent as the rupee collapsed after two years of money printing, and holders lost about 20 billion US dollars in value, based on data released by the Finance Ministry shows.
Around 24 percent of out of a 26 percent expansion of debt to GDP ratio from December to June came from foreign currency debt.
Sri Lanka rupee debt which was valued at 50.5 billion US dollars by December 2021 had fallen to 32.4 billion US dollar equivalent by June 2021 according to an investor update, even as the more rupee debt was taken to fund the deficit.
The dollar value of rupee debt was down 35.8 percent by June.
The fall in the original December 2021 debt re-worked at a rate of 200 to the US dollar and 360 by June was 22.4 billion US dollars or a dollar hair cut of around 44 percent.
Sri Lanka’s economy is inflating rapidly after the currency collapsed from 200 to 360 to the US dollar and revenues were up 29 percent by June. By August revenues were up 38 percent also helped by tax hikes.
Foreign investors and domestic holders of dollar debt are protected from the steep inflationary fall of value which is in the nature of a monetary default, generally known and high inflation and financial repression (IFR).
Though interest rates shot up to 30 percent, partly due to fears of second hair cut on rupee debt in the form of a re-structure.
Central government debt rose to 127.7 percent of GDP by June from 101 percent in December.
Almost the entirety of the debt increase came from dollar debt, which had shot up by 24.5 percent of GDP even as the dollar amount fell.
The US Fed issued generally better money than developing country pegged central banks with policy rates, preserving its real value better.
Sri Lanka defaulted on its foreign debt in April 2022 after several years of money printing under ‘flexible inflation targeting’ led to serial currency crises, depreciation and run down of foreign reserves.
Countries Latin America with similar central banks which were held in check during the Bretton Woods period under a gold target, also started serial defaults mostly after 1980 when errors in targeting interest rates came to compensated by currency depreciation under basket-band-crawl or BBC policy, now called flexible exchange rates.
Sri Lanka is continuing to service foreign debt of multilateral lenders.
Multilaterals including the IMF do not re-structure debt or take hair-cuts.
Market access countries with Latin America style central banks generally cannot escape from default, since the core problem of anchor conflicts involving flexible policy cannot be solved. (Colombo/June22/2022)