CB refutes claims that higher rates put strain on government funding

• Says higher rates compel govt. to cut borrowings, raise revenues and thereby aim a primary surplus 

Pushing back on the claims that higher rates cause the government to foot an enormously high interest bill on the borrowings it makes, the Central Bank said the data from the last two years proved otherwise even when the interest rates remained at historical low levels. Therefore, the rates wouldn’t necessarily determine the amount of borrowings and their related costs but a sensible fiscal policy does. 

Responding to a question on how the Central Bank would defend its higher interest rate policy in view of the rising debt servicing burden of the government, Central Bank Governor, Dr. Nandalal Weerasinghe said such a policy compels the government to fix its budget through revenue and expenditure management, which is entirely within its control and thereby report a primary 
account surplus.  
Primary account balance in the budget is the difference between State revenues and expenditures barring the interest cost. 

The only time Sri Lanka achieved a surplus in the primary account in recent history was in 2017 and in 2018 when the country was under its 16th International Monetary Fund (IMF) programme. 
Even then, the two surpluses came in at slightly above zero at 0.02 percent and 0.6 percent of the Gross Domestic Product (GDP). The government this time has committed for a 2.3 percent primary account surplus in 2025 under its 17th programme with the IMF, which appears to be a tall order to achieve, according to both international and local economists. 

While the progress reversed in 2019 due to the Easter Sunday deadly attacks, heightened political uncertainty and the Presidential polls held in that year resulting in a 3.6 percent primary deficit, the pandemic induced lockdowns and the tax concessions delivered in late 2019 caused the deficit to expand to 4.6 percent and 6.0 percent in 2020 and 2021. 

Dr. Weerasinghe said just like any other entity, the government too is required to find its optimal funding mix and make necessary reforms to rely less on borrowings to meet their expenditure needs, especially when rates remain elevated.  “This is why even under the current fiscal consolidation programme, the government will have to report a primary account surplus of the fiscal account that will help to bring the debt to a sustainable level,” he said. 
“Like any other entity, if the government finds that interest rates are too high, they will have to bring down borrowings. To bring down borrowings they will have to increase revenues. As a result their interest expenditure is going to be lower going forward”, elaborated the governor, explaining how the government could escape the implications of higher rates. 

He recounted how the two years of blow-out budget deficits in 2020 and 2021 were funded through printed money citing historically low interest rates, which neither helped the government to keep its debt servicing expenditure under control nor retain its debt at a sustainable level, and instead fired the worst inflation Sri Lanka has ever experienced while plunging the country into a debt default. 
Thus he said printed money is not free money.