New NPP govt. mirrors RW regime’s borrowing strategy: Economists

By Nishel Fernando

Colombo, Oct 18 (Daily Mirror) - Sri Lanka’s new NPP government is following a similar borrowing strategy to the Ranil Wickremesinghe regime, raising significant funds from domestic markets to manage its debt, according to leading economists.

The approach signals a continuation of the fiscal policies tied to the IMF-backed stabilization programme.

Since the recent presidential elections, the new administration has borrowed Rs. 539.5 billion, with Rs. 444.5 billion raised through treasury bill auctions and Rs. 95 billion through treasury bond auctions.

First Capital Research (FCR) Chief Research & Strategy Officer Dimantha Mathew explained that these auctions were primarily conducted to settle maturing debt and make coupon payments.

“Broadly, if you take the maturities and coupon, it’s at similar levels on a monthly basis,” Mathew told Mirror Business, adding that the government has stayed within the debt ceiling set by the previous administration.

In comparison, during a similar period last year, the previous government raised Rs. 837.72 billion through domestic debt markets, which included Rs. 591.76 billion in treasury bills and Rs. 245.96 billion in treasury bonds, a slightly higher figure than the current administration's borrowing so far.

Mathew pointed out that yields on government securities have been gradually decreasing, supported by prospects of a stable majority government and the potential for a sovereign credit upgrade. Yields on short-term treasury bills have dropped to around 10 percent, while those on 2-3 year bills have fallen to 11.5 percent to 12.5 percent.

Advocate Institute Chairman and JB Securities CEO Murtaza Jafferjee emphasized that the government is not borrowing excessively to fund primary expenditure.

“The government is running a primary balance surplus, so they are not borrowing to pay for primary expenditure. In fact, part of the primary balance is being used to shore up their cash buffers to meet unexpected shocks and reduce borrowing,” Jafferjee said.

Jafferjee added that large bond auctions are aimed at improving debt sustainability.

“The large bond auctions are not only to settle maturing debt but to reduce our annual gross financing needs by issuing longer-maturity debt,” he explained.

However, both experts agreed that Sri Lanka must see yields come down further, particularly to the 9-10 percent range, to achieve debt sustainability targets. FCR expects long-term bond yields could reach 11.5 percent by the end of the year.