Budget’s foreign financing continues to remain negative through Nov. 2020

• Budget’s foreign financing recorded net repayment of Rs.246.4bn as of Nov. 2020
• As a result, total outstanding foreign currency debt stock at 64.5% GDP compared to 67% at end-2019

The foreign financing of the budget in 2020 continued to be in the negative as the government settled more of its outstanding loans to foreigners in the eleven months to November compared to net foreign borrowings in the same period in 2019. 

The Treasury data available through November 2020 showed that foreign financing of the budget recorded a net repayment of Rs.246.4 billion compared to a net borrowing of Rs.283.3 billion in the corresponding period in 2019, as the pandemic closed windows available for the government to make fresh commercial borrowings abroad, forcing it to skew more towards domestic markets. 

This also synchronised with the government’s strategy to become less reliant on foreign borrowings, while the historically low interest rates in the domestic market opened a new and attractive window to rely more on rupee borrowings, which never poses the government to the risk 
of default.

Mirror Business last week showed that, despite the continuous battering over huge foreign debt piles, Sri Lankan government had paid down a sizeable portion of its outstanding foreign currency debt to bring it down to about US$ 45 billion by the end of 2020 from a little over US$ 50 billion, when it peaked in 2019.

In rupee equivalents, the total outstanding foreign debt stock slid from Rs.6, 402.4 billion in end-2019 to Rs.6, 393.7 billion by November 2020. The Treasury data for December isn’t available yet.

As a result, the total outstanding foreign currency debt stock now amounts to 64.5 percent of the Gross Domestic Product (GDP) compared to 67 percent at the end of 2019. 

Meanwhile, reflecting the government’s debt management strategy, the total domestic debt component rose by Rs.1,822.8 billion in the eleven months to November 2020 compared to Rs.630.4 billion in the corresponding period in 2019. 

The bulk of these borrowings were coming from Treasury bills and bonds or newly printed currency.

Some economists argue that this strategy is suicidal as this could both stoke inflation and weaken the currency by generating an excess demand in the economy. However, the Monetary Board expects inflation to be around 4 to 6 percent by end of this year.

By the end of November 2020, Sri Lankan government had Rs.8, 424.1 billion of total outstanding domestic debt, up from Rs.6, 629.1 billion. However, the rising debt now has a declining cost. 

Standard Chartered Bank recently projected Sri Lankan government’s interest costs to fall to 55 percent of State revenues in 2021 from 70 percent in 2020. 

Making the comparison in relation to the size of the economy, the Asia-titled lender forecasted the interest cost to fall to around 5.8 percent of GDP in 2021, from 6.3 percent in 2020, in a sign that fresh borrowings come at a lesser cost, leaving more money for other spending. 

Meanwhile the government’s total outstanding debt stock rose by Rs.1,786.2 billion in the eleven months to November 2020 to end at Rs.14,817.7 billion.