The changing debt dynamics as a result of Sri Lanka graduating to lower middle income status has increased the country’s debt vulnerability, and the situation could aggravate to a crisis unless the government takes remedial measures to address the situation, a leading economist in the country said.

According to Dr. Indrajith Coomaraswamy, the government is now borrowing at over 6 percent and sometimes even at 9 percent or 10 percent through treasury instruments. The share of external debt has also considerably risen with both short-term and commercial borrowings expanding their share.

“So, now, this is entirely a different ball game to what we experienced in the past. Although at the moment we are not in a red light zone, this is an amber light. So, I think it is now time for caution,” he said.

It was only last week International Monetary Fund (IMF) called for immediate fiscal reforms to avert negative consequences stemming from the change in country’s debt dynamics.

Let’s do our fiscal adjustments when things are favourable rather than having to do it later when conditions are not so favourable,” IMF Resident Representative, Dr.Koshy Mathai said.

Dr. Coomaraswamy who is also the former Director of the Commonwealth Secretariat Economic Division further said even when the country had an over 100 percent debt to GDP ratio seven years ago, Sri Lanka did not have much pressure because, the debt consist of concessional loans.

“They were ‘ never never money’ because Sri Lanka had long been a ‘donor darling’ of the traditional agencies. They were very keen on supporting Sri Lanka to deliver growing development outcomes to show that their development model could work in these newly liberalized countries.”

“The problem with generous dose of foreign aid received to bridge our unsustainable budget deficits was that Sri Lanka never had to take tough decisions. The tough structural changes that had to be made to address the budget deficit were never taken,” he noted.

Prior to 2009, 75 percent of the loans had been concessional aid received from World Bank and Asian Development Bank , 15 percent been commercial and the rest were grants.

“These concessional aid had 10 years of grace period, 30 to 40 years of maturity period and 0.75 percent of administrative charge and the interest could be even below 2.5 percent,” Dr. Coomaraswamy explained.

He made these comments addressing a seminar titled ‘Developing prospects for middle-income Sri Lanka: Challenges and Opportunities’ organized by South Asia Policy and Research Institute (SAPRI) on invitation by the former President Chandrika.