Sri Lanka brings down foreign debt component to 38% from 48% in 2019

• But currency depreciation caused rupee value of foreign debt to add Rs.578bn into debt stock 

Although Sri Lanka is facing an uphill task of meeting its near-term foreign currency debt obligations coming due, the country has managed to gradually cut the foreign component of its public debt during the 19 months to July, bringing it down to below 40 percent, staying on course to take it to 30 percent and below by 2025. 

However, the sharp depreciation of the rupee against the dollar has added more than half a billion into its outstanding foreign currency debt during the seven months to July 2021, reflecting what the weaker rupee could do to the country’s indebtedness, even though not a single dollar of debt is raised. 

According to the data made available by the Central Bank in its recent publication titled ‘Recent Economic Developments - Highlights of 2021 and Prospects for 2022’, the share of the outstanding foreign debt of the central government has come down to 38.4 percent of the total central government debt by July 2021, compared to 40 percent at the end of 2020.

The government in July settled a billion dollar sovereign bond, the second since last October, when a similar sized bond was settled. And two more sovereign bonds, with a cumulative value of US $ 1.5 billion, are coming due in January and July next year. 

The share of foreign debt in relation to the total central government debt at the end of 2019 stood at a high of 48 percent.  

But the incumbent government, which came to power in November 2019, took it upon to retire the foreign commercial borrowings and replace with alternative means, which includes bilateral funding sources, non-debt-creating inflows and direct investments. 

But the plans went awry when the latter two ran dry from around March last year, due in large part to the pandemic and other policy mishaps to a lesser degree, prompting the authorities to sink into its external reserves to meet its foreign debt commitments. 

According to Central Bank Governor Ajith Nivard Cabraal, a key architect of the foreign debt management strategy and broader economic policy of the current government, they had settled in total US $ 6.0 billion in foreign current obligations in 2020 and another US $ 6.6 billion thus far this year.

Despite the settlement of dollar debt, the rupee depreciation of about 7.2 percent thus far this year, did the opposite by adding Rs.577.9 billion of debt in rupee equivalent to the total foreign debt stock. 

As a result, the total outstanding foreign debt stock by July 31 was at Rs.6,434.2 billion, up from Rs.6,052.2 billion at the end of 2020. 

This provides a glimpse of the extent to which the kind of blow out that could result in the foreign currency debt stock should the rupee is allowed a free float as called by some quarters. 

Sri Lanka has a total outstanding public debt of Rs.16,751.7 billion, of which Rs.10,317.5 billion or 61.6 percent is in domestic sources as the government leaned heavily on the domestic borrowings since last year to bridge its expanding budget deficit, making most of the lowest interest rates. 

For instance, the domestic borrowings went from Rs.6,830.3 billion in 2019 to Rs.9,065.1 billion in 2020 to its current level by July 31, 2021, reflecting how fast the domestic section of the borrowings climbed. 

This condition also helped the foreign part of the borrowings to fall to 38 percent in relative terms during this two years through 2021. 

However, with the pressure on the foreign currency and inflation has limited the ability of the government to continuing on its money printing spree to fill its fiscal gap. 

During the last two months, the Central Bank was seeing gradually unwinding its bill stock held on behalf of the government and the bills and bond auctions have also seen receiving full subscriptions with the yields continued to ease.