Govt. debt-to-GDP ratio hits highest level since 2005

• Govt. debt to GDP estimated to have risen to 83.6% by end-2018, from 77.6% in 2017
• Total external debt stock, excluding foreign holdings of bonds, bills and SOEs, at US $ 32.4bn 
• Govt. revises targets and now hopes to bring down its debt stock to 72% of GDP by 2022
• To set up an independent debt management agency to strengthen public debt management  

By Nishel Fernando

The government debt to GDP is estimated to have risen sharply to the highest levels since 2005, to 83.6 percent of GDP by end-2018, from 77.6 percent of GDP recorded at end-2017, according to the provisional figures released by the Finance Ministry.  

By end-November 2018, the total outstanding external debt of the government stood at US $ 32.4 billion, excluding the non-residential holdings of treasury bills/bonds and outstanding debt of state-owned enterprises (SOEs).  

Sri Lanka was earlier expecting a marginal reduction of the government debt this year, from the 76.6 percent of GDP last year, aiming to bring down the government debt to 70.9 percent of GDP by 2020.

However, due to the sharp increase in government debt, the Finance Ministry has revised the earlier targets.

According to the Fiscal Management Report 2019, Sri Lanka is now targeting to bring down the outstanding government debt stock to 72 percent of GDP by 2022, with prudent deficit curtailment measures planned over the medium term.

During last year, the government has borrowed Rs 1.78 trillion from domestic and external sources.

According to the provisional figures, the government has spent US $ 1.39 billion for principal debt repayments and US $ 954.7 million for the interest payments, during the first 11 months of 2018.

The Finance Ministry announced that the government is implementing the Medium-Term Debt Management Strategy (MTDMS) by utilising the provisions of newly enacted Active Liability Management Act.  

“In support of the use of active liability management operations, the government is reinforcing the Medium-Term Debt Management Strategy (MTDMS) with an overarching objective of containing the exposure of foreign outstanding liabilities at manageable levels. 

The MTDMS enables the government to identify and quantify the main risks of public debt portfolio, thereby helping to specify an appropriate currency and maturity composition of the debt issuance strategy,” the Fiscal Management Report noted. 

The report also said that the future government borrowings would be carried out in accordance with an annual borrowing plan, which forms an integral part of the government’s efforts towards bringing the public debt to prudent levels.

Furthermore, the government plans to set up an independent debt management agency to further strengthen the public debt management of the country. 

“Once established, such agency will conduct all operations relating to issuance of government debt and secondary market activities in line with the medium-term debt management strategy. 

Further, measures will be taken to keep the contingent liabilities in check by curtailing the outstanding amount of government guarantees at below the prescribed levels,” the report stated. 
The Finance Ministry reasoned that lower than estimated revenue mobilization due to delayed implementation of newly enacted Inland Revenue Act and slower than expected recovery of the domestic economic activity hindered the government’s fiscal targets in 2018.

Sri Lanka plans to curtail the budget deficit to 3.5 percent of GDP by 2021, from an estimated budget deficit of 5.3 percent of GDP last year.

Accordingly, the economic growth is expected to move up to 3.5-4.5 percent in 2019 and to about 5.0 percent in 2022.