A coalition of national organizations and local groups around the United Kingdom (UK) who call for the cancellation of unjust and unpayable debts of the poorest countries – Jubilee Debt Campaign – says Sri Lanka is entangled in a debt trap as the country’s debt indicators have reached beyond their tolerable levels.  

If a country’s current government external debt payment is more than 15 percent of government revenue and its net debt is more than 30 percent of the gross domestic product (GDP), Jubilee Debt Campaign categorizes a country to be in a debt trap. 

Sri Lanka’s situation in these two indicators remains at 15.8 percent and 55 percent respectively and, is grouped among Zimbabwe, Sudan, Lebanon, Croatia and Portugal. 

Meanwhile, Sri Lanka’s total debt service as a percentage of revenue increased from 92.5 percent in 2011 to 102.2 percent in 2013, indicating that the debt servicing exceeds total government revenue. 

It was only last week the Central Bank Governor, Arjuna Mahendran expressed similar sentiments at the Association of Professional Bankers’ 27th anniversary convention where he remarked about the last regime’s foreign debt funded infrastructure development. 

“We may have fallen into a trap in the last five to seven years of perhaps becoming exceedingly depended on foreign savings that we borrow to try and fund our development,” Mahendran was quoted to have said. 

Sri Lanka’s total external debt to GDP increased from 42 percent in 2006 to 58 percent in 2014. Further, the non-concessional borrowings’ share of the outstanding external debt rose from just 7 percent in 2005 to 50 percent in 2012.  

Further, in comparison to emerging markets in other regions such as Asia, Europe and Latin America, Sri Lanka remains an outlier by a large margin in debt to GDP and debt to government revenue.  Ex-regime has been relishing the declining debt to GDP level from 105 percent in 2002 to below 80 percent in 2014 but arguments remain as the number is underestimated as there are huge off-balance sheet debt unaccounted for.   Amid intolerable debt levels, Sri Lanka last week raised US $ 1.5 billion through a sovereign bond at a yield of 6.85 percent – the highest interest rate since the country tapped the international capital market in 2007. 

While Sri Lanka has not reached the stage of Greece and Argentina which defaulted on their sovereign borrowing payments, the executive director of the Institute of Policy Studies (IPS) – an economic think tank based in Colombo – Dr. Saman Kelegama said the debt repayment and foreign reserve management are now becoming difficult. 

The fact that Sri Lanka recently having to request China to allow it more flexibility with regard to repayment of debt (interests on debt) was an indication of the developing pressure on debt servicing, said Dr. Kelegama, speaking at the Sri Lanka Economic Association annual sessions last week.

As a result, Sri Lanka has been pushed into a vicious habit of borrowing to repay debt as the debt funded investments – mostly on projects selected on political imperatives – have failed to yield the desired returns.

Hence, debt roll-over – annual interest payments and repayment of maturing loans - has become the norm, which in turn exerts pressure on the currency and increases the currency risk, thereby bringing down the sovereign ratings. 

Sri Lanka’s sovereign rating has not improved from BB- (Fitch) despite a reform-oriented government. 

In this backdrop, Dr. Kelegama reiterated that it is high time Sri Lanka made the transition from the commercial debt funded, state-led infrastructure development growth model to an export-driven and foreign direct investment funded, and private sector-led economic growth model. 

The country awaits a crucial statement from the Prime Minister Ranil Wickremesinghe on the economic direction of the national unity government on November 5.