Forex blunder fuels foreign debt by Rs. 76 b

The volatility as well as mishandling of the foreign exchange market has caused a major blow to the country with an increase of a massive Rs. 76 billion in external debt, according to Central Bank sources.

There was a significant rise in foreign debt during the first eight months of 2007 and the Bank said it was mainly due to the depreciation of the rupee against major foreign currencies.

The rupee depreciated vis-à-vis the US dollar, SDR, Euro and Japanese yen by 4.7 per cent, 6.5 per cent, 8.4 per cent and 7.1 per cent, respectively during this period.

“The total impact of the exchange rate variation during the first eight months of 2007 was an increase in the foreign debt by Rs. 76 billion,” the Bank said in a report released last week.

Sri Lanka’s total debt service payments during the first eight months in 2007 amounted to Rs. 315.6 billion. This consisted of amortisation payments of Rs. 197.4 billion (62.4 per cent) and interest payments of Rs. 118.3 billion (37.6 per cent).

In 2007, the total debt service payments would to amount to Rs. 516.8 billion. This consists of amortisation payments of Rs. 345.4 billion and interest payments of Rs. 171.4 billion.

Bank expects the pace of depreciation of the exchange rate during the year 2007 is likely to moderate during the rest of the year with the successful realisation of Sri Lanka’s maiden sovereign bond issue in the international market.

The nominal depreciation of the exchange rate recorded 5.1 per cent by end September 2007, from end December 2006. In order to reduce undue volatility in the exchange rate, the Central Bank has intervened in the foreign exchange market and its intervention was mainly to supply foreign exchange since end May 2007.

Accordingly, the Central Bank has recorded cumulative net sales of US dollars 111.2 million by end September 2007.

Total outstanding government debt increased by Rs. 331 billion to Rs 2,938 billion as at end August 2007 compared to that of end of 2006. Foreign debt increased by Rs. 144 billion to Rs. 1,275 billion while domestic debt increased by Rs. 188 billion to Rs. 1,663 billion.

The Bank said according to the revised estimates, the outstanding government debt at end 2007 would decline further to 85.5 per cent of GDP. This would be due to the higher growth in nominal GDP compared to the growth in nominal debt.