The total government debt as at end of August 2012 stood Rs.6249 billion against Rs.5059.1 billion reported in the same period of 2011, amidst rising domestic and foreign debt, the latest data released by the central Bank showed.

The total domestic debt which consists of treasury bills, bond and rupee loans stood at Rs.3253.2 billion at the end of August 2012, against Rs.2801.7 billion recorded in the same period of the previous year while total foreign debt rose to Rs.2995.8 billion against Rs.2257.3 billion. Thus, total outstanding government debt increased by 21.7 percent compared to end December 2011.

Rising bill yields during treasury bill auctions in the recent times showed that the borrowing costs of the government was on the up. The total debt that is derived from treasury bills at the end of August 2012 stood at Rs.802.9 billion vis-à-vis Rs.616.2 billion. Meanwhile government’s revenue during the January-August 2012 period rose 11.2 percent Year-on-Year to Rs.645.5 billion with both tax and non-tax revenues rising.

Sri Lanka has been borrowing from international commercial markets through sovereign bonds and also is at the receiving end of large volumes of money from China’s Exim Bank and Development Bank of China.

According to independent economists in the country, the pile of foreign debt is expected to increase with proposed foreign borrowings in the future.

They further note that the danger of more borrowings will be a severe strain on the balance of payment situation. In 2011, Sri Lanka faced a severe balance of payment crisis and had to seek the help of International Monetary Fund (IMF) to get out of it. Given the high amount of foreign debt, the foreign debt servicing costs (capital + interest) is also expected to surge substantially.

According to some economists, high debt servicing costs amidst slowing down export earnings can lead the country into a foreign debt trap situation, as the country may need to opt for further foreign borrowing to service earlier debt.

Sri Lanka’s exports in the first eight months of 2012 dropped 5.8 percent Year-on-Year (YoY) to US $ 7,393 million while the balance of trade narrowed 0.3 percent YoY to US $ 6779.9 million.

Although expenditure on imports is also slowing down in tandem with exports due to the tight monetary policy the Central Bank has adopted, the imports are decelerating at a significantly slower rate.

Further, with increased foreign inflows to the stock market, worker remittances and tourism earnings being positive, economists point out that the cushioning effect of these inflows will be considerably hindered by the high foreign debt obligations the country is inherited with.