ECONOMYNEX T – Sri Lanka still believed that its economic plan required no domestic debt re-structure State Minister for Finance Shehan Semasinghe told parliament as interest rates remained elevated over fear of a rupee debt default.
A domestic debt re-structure will hit banks, the Employees Provident Fund and inflation was also high, he said.
“So that is why until the bilateral creditor discussions are over, we will not take a decision,” he told parliament.
“But we believe through these our plan of action (weda piliwela) there will be no need to restructure domestic debt.”
Sri Lanka has to re-structure because debt has been deemed ‘unsustainable’ and partly because annual rollover (Gross Financing Need) has topped 35 percent of GDP which is considered too high.
However large volumes of rupee debt are held in the hands of the Employees Provident Fund, which has no option but to roll-over, while the real value of debt has collapsed due to an inflating economy.
Banks are also required to hold government debt as part of their liquid reserves.
Sri Lanka lost the ability to repay foreign debt or make imports, after two years of money printing to suppress interest rates created forex shortages and sovereign bond holders refused to roll-over debt and country got locked out of capital markets as rating agencies downgraded the country.
Sri Lanka’s growth slowed after the end of a 30-year war as intensified monetary activism (liquidity injections to target an output gap) under discretionary ‘flexible inflation targeting’ led to serial currency crises accompanied by output shocks, and a spike in foreign borrowings.
Sri Lanka’s rupee collapsed from 113 to 360 through currency crises of 2012, 2015/16, 2018 and 2020/22, though net foreign debt started to ratchet up mostly from 2015 after the IMF taught the country to calculate an ‘output gap’ encouraging inflationary policy to close the gap.
In the 2022/22 crisis – where taxes were also cut claiming there was a ‘persistent output gap’ the central bank not only ran down also its reserve but became a net borrower. (Colombo/Nov22/2022)