Public debt surges by Rs.1.6tn in first seven months as pandemic batters state revenues

„■ Total public debt as at end-july at Rs.16.8tn, up from Rs.15.1tn in Dec. 2020

■ „SL settles foreign debt by nearly Rs.200bn, further reducing reliance on FX debt

„■ Outstanding FX debt stock however up by 6.3% to Rs.6.4tn on weaker rupee

■ „Total domestic debt stock up by 13.8% to Rs.10.3bn as govt. leans heavily on rupee debt

The outstanding debt of the Central government rose sharply in the first seven months of 2021, with the domestic financing increasing the most, as the budget deficit expanded to large proportions when the pandemic knocked the state revenues off course since April this year, when the restrictions returned.

According to the latest fiscal data, the total outstanding Central government debt rose by Rs.1,634.5 billion or 10.8 percent in the first seven months of 2021 to Rs.16,751.7 billion by the end of July, from Rs.15,117.2 billion by the end of 2020.

Sri Lanka’s budget deficit rose to Rs.1,014.5 billion, from Rs.872.6 billion in the corresponding period in 2020, as tax revenues lagged enormously or by at least Rs.1.5 to Rs.1.6 trillion in the first six months against the forecast, according to the Finance Minister.

This condition was further worsened when the government had to expense for the virus containment efforts and also to provide financial assistance for those who lost their livelihoods each time the lockdowns were reimposed.

The bulk of the financing of this deficit came from the domestic borrowings, large proportions through the Central Bank liquidity, which is referred to as the printed money, as it remained the only viable option for the state to bridge the budget deficit, when the options to raise moneys from foreign sources ran dry.

By the end of July 2021, the Central Bank holdings of government securities were at Rs.1,141.05 billion, up from Rs.725.19 billion by December 2020 and Rs.78.21 billion by early March that year, before the virus forced economic shutdowns. By October 6, this week, this stock had risen to Rs.1,442.79 billion.

The government’s domestic financing pivot is also reflected through the net repayment made on foreign financing, which amounted to Rs.190.1 billion in rupee equivalent terms during January through July 2021, in comparison to net repayments of Rs.194.5 billion in the same period in 2020.

This also complements with the government’s foreign debt management strategy of gradually reducing the reliance it has on foreign currencydenominated debt so that the country’s susceptibility to future economic shocks could be minimised.

Central Bank Governor Ajith Nivard Cabraal said they would reduce the exposure to International Sovereign Bonds to 10 percent by 2024 and maintain at that level thereafter.

However, despite the net repayments of foreign debt, the total outstanding foreign currency debt stock in rupee terms rose by 6.3 percent to Rs.6,434.2 billion by July-end, reflecting what even a slight depreciation of the rupee could do the country’s total outstanding debt stock even when no fresh borrowings are made.

When the rupee weakens against the dollar, the rupee equivalence of the outstanding foreign currency debt stock increases when all else remain unchanged, worsening the foreign debt challenges.

Meanwhile, the domestic financing of the budget increased by Rs.1,204.6 billion in the seven months, compared to Rs.1,067.0 billion in the same period last year.

The total domestic debt stock rose by 13.8 percent or Rs.1,252.4 billion in the seven months to Rs.10,317.5 billion. The outstanding stock of treasury bills rose by Rs.385.5 billion or 23.8 percent to Rs.2,006.2 billion while the treasury bond stock rose by Rs.543.7 billion or 9.5 percent to Rs.6,257 billion.

While the domestic financing of the budget remained most economical for the government, given the record low interest rates, the practice continued for 18 months created some excesses by way of the recent foreign currency liquidity pressures and the bout of higher inflation ignited as of late, although the latter could not be fully attributed to the monetary policy measures, as the supply chain bottlenecks and the global commodities price bubble had more to do with the prices.

Meanwhile, the yields of the government securities have also risen sharply in the last three weeks, raising the debt servicing cost of the government of its domestic debt stock.