New debt piling up slows as govt. cuts spending

• Average monthly debt accumulation plunges to Rs.96bn in 2Q from Rs.244Bbn in 1Q 
• Total public debt rises Rs.1.23tn during first 7 months on pandemic-related spending 
• Govt. leans heavily on domestic sources for funding needs as borrowing cost remains lower 
• Foreign debt stock rose only by Rs.157bn during 7 months 
• Govt. plans to cut budget deficit to 4% of GDP and public debt to 70% by 2025 

The accumulation of new debt has significantly decelerated in recent months as borrowings, which peaked during coronavirus, largely ceased while the government consciously cut spending to prevent the budget from recording a blowout deficit.

The tax revenues were also seen picking up from July with the resumption of economic activity at its pre-pandemic speed after the lockdowns ended, adding more heft to government revenues.     

 
According to the data analysed, Sri Lanka’s average monthly public debt accumulation from April through June (2Q20) has slowed to just a quarter of what the country piled up during the first three months from January through March (1Q20), indicating that the government has become more disciplined in both deficit spending and adding new debt to the already high public debt pile. 

According to data, Sri Lankan government has added an average Rs.96.3 billion in new debt per month during the April-June quarter, significantly down from an average of Rs.243.7 billion added every month from January through March. 

According to the latest Finance Ministry data available up to end-July, Sri Lanka’s total outstanding public debt has increased by Rs.1.23 trillion during the first seven months as the government had to ramp up borrowings at the height of the pandemic to provide assistance to people whose livelihoods were affected while ratcheting up spending to battle the pandemic.
This was demonstrated by the Rs.262 billion in fresh debt added in April, the highest monthly amount so far this year. However, the debt stock contracted by Rs.129 billion in May as the government settled part of its debt.

By end-July, Sri Lanka had a total outstanding debt stock of Rs.14.26 trillion with June and July adding Rs.156 billion and Rs.209 billion in new debt, respectively.

During this period, the government heavily leaned on domestic sources for its funding needs as the cost of domestic borrowings became cheaper with faster decline in the domestic interest rates in response to the aggressive monetary easing delivered to soften the pandemic impact on the economy. 

Meanwhile, foreign borrowings became harder due to higher yields caused by the market unease due to the pandemic. 

As a result, the government’s total domestic debt stock, which largely consists of treasury bills and bonds, rose by nearly Rs.1.1 trillion, while the rupee equivalent of its foreign debt stock rose by Rs.150.7 billion. 

Economic analysts say the government’s ability to borrow and having higher room to increase borrowings become crucial during times of emergency to keep the economy afloat when the private sector could not operate at its peak, as seen during the pandemic. 

Both fiscal and monetary stimuli helped power economic activities, which otherwise would have suffered heavily, as they helped the sustenance of millions of people whose livelihoods were in jeopardy while keeping thousands of businesses afloat through easy access to liquidity. 

Meanwhile, the government revenues showed signs of uptrend as it recorded tax revenues of Rs.90 billion and Rs.144 billion in July and August respectively. The August figure was just shy of the Rs.150 billion raised through taxes in August in 2019. 

The government expects the budget deficit to be around 9.0 percent of gross domestic product in 2020. 

Meanwhile, the government plans to cut its budget deficit gradually to 4 percent of GDP and bring down public debt to GDP to below 70 percent from the current 93 percent by 2025, as part of its medium term economic policy slated to be announced with the maiden budget of the new government scheduled for November 17.