Sri Lanka’s government debt rose sharply to 109.3% of GDP in 2021: IIF

By Nishel Fernando
Sri Lanka’s government debt sharply rose to 109.3 percent of the county’s gross domestic product (GDP) in 2021 well above the frontier market average of 60 percent, according to the Institute of International Finance (IIF), a Washington-based global association of the financial services industry.

Among the 42 frontier markets, Sri Lanka’s government debt ratio was the fourth highest after Bahrain, Mozambique, and Maldives.

At-end-of 2021, the government debt rose to 109.3 percent of GDP from 101.2 percent a year ago while the average government debt ratio for frontier markets declined to 59.7 percent of GDP in 2021 from 61.3 percent a year ago.

“(Average) government debt (among FMs) declined slightly to 60 percent of GDP in 2021, just over a percentage point lower compared to 2020. Angola, Zambia, and Republic of Congo drove the decline in government debt ratios. 

In contrast, Rwanda, Trinidad & Tobago, and Sri Lanka recorded sharp increases,” IFF said in its latest Frontier Markets Debt Monitor report released on Wednesday. According to Central Bank of Sri Lanka, the country’s outstanding central government debt rose to Rs.17.41 trillion as of November last year, compared to Rs.15.11 trillion at-end of 2020.

Meanwhile, Sri Lanka’s overall debt rose to 187.3 percent of GDP from 179 percent a year ago driven by the sharp increase in government debt ratio. The country had fourth largest rise in overall debt ratios in 2021 behind Rwanda, Tunisia, Trinidad & Tobago and Laos.

The debt ratio of non-financial corporates in Sri Lanka was the third highest among frontier markets. It rose marginally 61.7 percent of GDP in 2021 from 59.9 percent in 2020. However, Sri Lanka household and financial sector debt ratios declined to 12.4 percent of GDP and 3.9 percent of GDP in 2021 compared to 12.6 percent and 5.3 percent in 2020. 

In addition, Sri Lanka’s borrowing costs on foreign loans rose notably during 2021, although, the country which is already grappling with Balance of Payment and foreign exchange crises, had already lost access to foreign capital markets due to credit downgrades.

Moving forward, IIF emphasised that persisting Inflationary pressures would force many of the monetary authorities in frontier markets to continue with monetary policy tightening, which could weigh on business confidence and economic activity. 

In addition, it also noted that frontier markets would have to find a balancing act to meet their growing spending needs amid policy tightening by the US Fed. 

“As the Fed hikes interest rates and signals a more aggressive fight to curb inflation, many FMs face higher interest payments and asset prices are most likely to remain under pressure this year. With limited fiscal space, it will be a balancing act for countries to address growing spending needs (on climate issues, infrastructure, etc.), while also generating revenues to increase fiscal buffers,” IIF said.