Monday, July 4, 2022

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Government gets set  to face severe domestic debt crisis 

Sri Lanka is getting ready to face evere domestic debt crisis by further increasing the credit limit of Rs. 3000 billion (3 trillion) previously approved by a resolution of Parliament under the Local Treasury Bills Ordinance, by another Rs. 1000 billion (1 trillion) was passed in Parliament without debate.

Accordingly, all necessary permission under Section 2 (1) of the Local Treasury Bills Ordinance will be given to the Minister of Finance for the purpose of borrowing a sum not exceeding Rupees Rs. 1,000 billion (1 trillion) through the issuance of Treasury Bills by the Government of Sri Lanka.

Thus, by 2021, the upper limit approved by Parliament for the issuance of Treasury bills is Rupees 3,000 billion (one trillion), and the total value of Treasury bills due by the end of April 2022 is about Rupees 2,860 billion.

Significant decline in government revenue collection due to COVID 19 epidemic conditions and other causes, approved expenses under Appropriation Act No. 30 of 2021 in addition to debt service payments, especially recurrent expenses and welfare expenses have to be borne, has led to an increase in the credit limit.

Further, the Ministry of Finance has had to resort to borrowing from local sources as it has lost access to international markets to raise funds from foreign sources due to the downgrading of Sri Lanka’s credit rating. 

Domestic debt service payments increased by 36.0 percent to Rs. 1,590.1 billion in 2021 reflecting the increase in amortization payments on the domestic debt by 74.5 percent to Rs. 795.5 billion and the increase in interest payments on the domestic debt by 11.4 percent to Rs. 794.6 billion in 2021, compared to Rs. 713.6 billion in 2020, Finance Ministry data shows.  

Domestic debt service payments as a percentage of GDP increased to 9.5 percent in 2021 from 7.8 percent in 2020. Domestic debt service payments recorded 109.1 percent of Government revenue in 2021, compared to 85.5 percent in 2020.

 Total domestic debt service payments which accounted for 66.9 percent of total debt service payments notably increased by 36.0 percent to Rs. 1,590.1 billion in 2021 whereas total foreign debt service payments marginally increased by 1.8 percent to Rs. 785.5 billion in 2021.

 Total domestic repayments increased significantly by 74.5 percent to Rs. 795.5 billion in 2021 from Rs. 455.9 billion in 2020 mainly due to the increase in maturing of Treasury Bonds and  Sri Lanka Development Bonds  SLDBs, Finance Ministry said.  

Interest payments on domestic debt increased notably by 11.4 percent to Rs. 794.6 billion in 2021 from Rs. 713.6 billion in 2020 due to the increased domestic borrowings owing to limited receivables of foreign financing and the rise in domestic interest rates particularly in the second half of 2021. 

In contrast, interest payments on foreign debt declined by 4.8 percent to Rs. 253.8 billion in 2021 from Rs. 266.7 billion in 2020 due to the decline in interest payments on ISBs, FCTFF and project loans. 

As a percentage of government revenue, total debt service payments increased to 163.0 percent in 2021 from 141.9 percent in 2020. Both debt repayment and interest payment as a percentage of government revenue increased to 91.1 percent and 72 percent, respectively in 2021. 

Total debt service payments as a percentage of GDP increased to 14.1 percent in 2021 from 12.9 percent in 2020. Debt repayment to GDP ratio increased to 7.9 percent in 2021 from 6.4 percent in 2020. In contrast, interest payments as a percentage of GDP declined to 6.2 percent in 2021 from 6.5 percent in 2020, the Finance Ministry disclosed. 

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