First half public debt up by Rs.1.5tn as restrictions bite revenues, other inflows

• Rupee debt rises mainly through treasury bonds, bills and rupee loans
• Govt. aims to bring down foreign currency debt share to around 30% next few years

Sri Lanka’s outstanding public debt rose by a little under Rs.1.5 trillion in the six months to June 2021 as the virus resurgence and the resulting restrictions pushed the country into further debt amid losing crucial tax revenues, debt repayments and higher expenses caused by virus containment efforts and welfare transfers made for millions who lost their daily wages. 

According to the latest Treasury data, Sri Lanka’s total outstanding debt comprising both rupee debt and foreign currency denominated debt rose by Rs.1,447.3 billion to Rs.16,564.5 billion by the end of June 2021. 
The rupee debt raised predominantly through treasury bonds, bills and rupee loans by the most or by Rs.866. 6 billion in the six months to Rs.9, 931.7 billion. 

In the treasury bond auction held on Monday, the first one since the Central Bank raised interest rates on August 19, the Debt Department failed to sell 92 percent of the bonds issued after majority bids receiving over the ceiling rates. 

The Central Bank on Monday issued treasury bonds to raise Rs.50.0 billion in two tenors—September 2023 and October 2025—but accepted only Rs.4.0 billion—Rs.800 million and Rs.3.2 billion—under the two tenors. 
Meanwhile, the total foreign debt including the ones raised via Sri Lanka Development Bonds rose by rupee equivalent of Rs.580.6 billion to Rs.6,632.8 billion by the end of June 2021. 

However, even with the fresh foreign currency debt raised through June, the share of foreign currency debt stood at 40.0 percent of the total outstanding debt, unchanged from the beginning of the year, and would have fallen further by July end with the retirement of a billion dollar sovereign bond. 

Sri Lanka aims at bringing down the share of foreign currency debt to around 30 percent within the next few years by increasing non-debt creating inflows such as merchandise and services exports, remittances, direct investments and partial sale of non-strategic State assets but with the pandemic still lingering, the near term outlook has 
turned grim. 

Sri Lanka has now resorted to stop-gap measures such as swap lines, other bilateral and syndicated loans to recoup its reserves which fell to US$ 2.8 billion in July. Sri Lanka last week received the International Monetary Fund allocation of its Special Drawing Rights, which was equivalent to US$ 780 million. 

Quick resumption of economic activities along with realisation of the aforementioned inflows including the gradual improvement in tourism trade are of paramount importance for the economy to avoid a hard landing on foreign currency debt while also redressing the multiple anomalies created within the domestic markets.