Lowest public debt burden in 23 years says Central Bank

By Nizla Naizer

Handling Sri Lanka’s public debt was a challenging task in 2008, said Central Bank Governor Ajith Nivard Cabraal at the launch of the publication on Public Debt Management last week, but compared to developing nations hit by the economic crisis Sri Lanka has continued to commit itself to the track record of never defaulting on its loans and emerging as a less indebted country.

*Total Outstanding Debt Stock in 2008, 81.1% of GDP
*Total Outstanding Debt Stock Rs. 3578 billion
*73% of Domestic Debt maturing within 3 years His optimism stems from the recently published data on Public Debt Management for the year 2008 where the country’s total debt increased by Rs. 536 billion to Rs. 3578 billion. As a percentage of the Gross Domestic Product (GDP) however, Sri Lanka’s total outstanding debt stands at 81.1%, which has declined from 85% in the previous year and is the lowest debt burden in 23 years. The domestic debt to GDP ratio increased to 48.3% while foreign debt to GDP decreased to 32.8% in 2008 while in 2007, it was 47.9% and 37.1% respectively.
Actual gross borrowings for the year amounted to Rs. 689 billion in 2008 which was within the Parliament approved limit of Rs. 708 billion for the year. The gross borrowing comprised of Rs. 559 billion and Rs. 130 billion from domestic and external (foreign) sources respectively. Central Bank Superintendent of Public Debt C.J.P.Siriwardene explained that while Sri Lanka’s debt burden is the lowest in 23 years changes to the debt structure emerged due to the depreciation of the rupee and the decrease in levels of external debt.
Managing public debt
As a part of the debt management strategy, the Government Securities market was expanded by opening the Treasury Bill market to foreign investors with a limit of 10% of the total outstanding treasury stock. Thus, total foreign investments in both Treasury Bills and Bonds increased to Rs. 71 billion by mid-September from Rs. 49 billion in end 2007. However, with the collapse of the Lehman Brothers in mid-September there was Rs. 47 billion worth of foreign withdrawals till end December 2008 creating enormous pressure on the stability of the domestic rupee market and the local forex market.
The difficulty experienced in foreign borrowing required the shortfall to be covered through the domestic rupee market and the need was more urgent with the high budget deficit witnessed last year. Domestic borrowing through Treasury Bonds and Treasury Bills increased to Rs. 407 billion and Rs. 62 billion respectively from the targeted amount of Rs. 362 billion and Rs. 10 billion at the beginning of the year. While total domestic debt exceeded its target by Rs. 160 billion to reach Rs. 314 billion, the increase of domestic debt resulted in the net credit to the government from the banking system to increase to Rs. 195 billion compared to the original target of Rs. 9 billion.
While the Treasury Bill market was opened to Foreign investors last May, investors registered in the Central Depository System (CDS) of government securities increased by over 34% to 5 6041 individuals in 2008. Local banks were also allowed to purchase Sovereign bonds in the secondary market.
The cost of Interest and the impact of rupee
depreciation
The total interest cost on public debt in 2008 was Rs. 212 billion which amounts to 4.8% of the GDP, a decline from 2007 where the interest to GDP ratio was 5.1%. The cost included Rs. 182 billion and Rs. 30 billion in domestic and foreign debt respectively. While interest rates in the domestic market were on a continuously decreasing path till September 2008, with the turmoil in the international financial market which resulted in higher domestic borrowing, the rates gradually increased once more.
However, with 672 active foreign loans in the country, the depreciating rupee in 2008 led to an increase in Rs. 698 billion or 43% of the total outstanding foreign currency debt stock which amounted to Rs. 1,615 billion. This impact was mainly caused due to the depreciation of the rupee by 29% in comparison to the Japanese Yen and 4 % depreciation compared to the US Dollar.
While 85% of the foreign debt are in the form of concessional loans 36.7% were in the form of SDR, 30% in Japanese Yen and 17.7% in US$. The largest contributors have been Japan, ADB, IDA and the World Bank.
Maturing loans
The year 2008 witnessed large borrowings from the domestic market with a strong preference towards short term maturities towards the latter months as the rising interest rates in the market resulted in the bunching of the domestic debt portfolio to short to medium term period. However, this has resulted in 42% or Rs. 836 billion of the domestic debt maturing in 2009 with 94% of the total domestic debt will be maturing before 2014. The maturing amount in 2009 will be rolled over together with raising new funds to meet the budgetary requirements in 2009 and has led to the duration of domestic debt to decrease to 1.6 years at the end of 2008 from 1.8 years in 2007.