ECONOMYNEXT – Sri Lanka will cut the share of foreign debt to 40 percent by 2021, raise more domestic debt and repay foreign debt, riding on Modern Monetary Theory to solve debt problems, Central Bank Governor W D Lakshman said.
“Our strategy is going to pay off foreign debt,” Governor Lakshman told an annual economic forum organized by Sri Lanka’s Ceylon Chamber of Commerce.
“This and the stated policy of not pursuing debt creating investments will help manage the fiscal situation.”
The domestic to foreign share of debt will 60 to 40 in 2021 from 55 to 45 in 2020.
In 2019, the domestic share was 51 percent and foreign 49 percent, State Minister for Finance Nivard Cabraal had said earlier.
Sri Lanka’s ratio of non-concessional debt is 23 percent, he said. The remainder is domestic debt or long term concessional debt.
“The fears around debt sustainability appear to be unfounded,” he said.
As rupee-denominated bonds were within the ‘sovereign powers’ money could be printed to repay them as indicated by ideas like Modern Monetary Theory, he said.
“One of the factors we are depending heavily on in terms of government debt is to increase the proportion of domestic debt,” Governor Lakshman said.
“The domestic currency debt – if I may also use the term – in a country with sovereign powers of money printing as the modern monetary theorists would argue – is not a huge problem.
“The debt can be rolled over. That is when it is mostly the domestic debt.”
However concerns have been raised that the debt is not being rolled over but paper debt is being turned in to reserve money through failed bill auctions.
Countries like Japan, Singapore, US also had large domestic debt shares exceeding the gross domestic product, he said.
Countries with strong exchange rates tended to have low-interest rates.
Singapore, which borrows to give returns to it Central Provident Fund, and also build a risk free yield curve, invests the proceeds through Government Investment Corporation, with the Monetary Authority of Singapore converting the funds to foreign exchange.
The MAS law prohibits money printing, and has a floating policy rate.
Sri Lanka is following a form of austerity on its own terms through import compression, he said.
“This year we have reduced imports by four billion dollars which is equal to total debt repayment,” he said.
Sri Lanka’s imports are driven by merchandise exports, services exports, tourism as well as government foreign borrowing and foreign direct investment.
A trade or current account deficit is driven by a savings-investment gap, which is financed from abroad. (Colombo/Dec01/2020 – Update III)