In the wake of mounting domestic borrowings , stockbroking firm CTCLSA has suggested the government to restructure domestic debt along with foreign debt restructuring as both issues aggravated to critical level.
The Finance Ministry has tightened domestic borrowing while controlling expenditure of ministries, departments and state institutions owing to its rising debt payments this year.
As per the existing budgetary estimates, the government debt to GDP ratio is to decline to 101.7 per cent of GDP in 2022 from 102.8 per cent in 2021.
The Sri Lanka Government debt is projected to trend around Rs. 1.95 trillion in 2022 and Rs. 2.2 trillion in 2023 from Rs.1.65 trillion in 2021, according to econometric models and provisional estimates of the Finance Ministry.
The domestic debt service payment this year is around Rs.80.72 billion and it is expected to increase to a high level if the government fails to control its domestic borrowings.
Restructuring of foreign debt must be accompanied by a similar exercise on domestic debt to derive fuller benefits opines stockbroking firm CTCLSA.
Following President Gotabaya Rajapaksa, indicating seeking International Monetary Fund’s (IMF) assistance to fix the ongoing economic crisis, CTCLSA believes the IMF may suggest a Debt Restructure for Sri Lankan debt given its classification of the same stands at an “unsustainable” state.
In a research note, CTCLSA said with Sri Lanka’s Public debt to Gross Domestic Product (GDP) ratio standing at 119% as of 31 December 2021, a restructure of both domestic and external debt would be ideal for the economy to move ahead with acceptable reforms that could avert any similar crisis in the foreseeable future.
However, IMF data from 1980-2020 for Domestic Debt Restructures (DDR) and External Debt Restructures (EDR) suggest that if restructured by averting a banking crisis, the economy under restructure would manage to avert any real contraction in GDP following such reform.
CTCLSA argued that a domestic debt restructuring can be designed to limit bank losses.
For example, the impact of a sovereign domestic debt restructuring on banks’ balance sheets has in some cases been limited when the restructuring did not involve any principal haircut but was designed as reprofiling with moderate loss.
CTCLSA said most of the Sri Lankan foreign debt is in the form of International Sovereign Bonds (ISBs,) whilst the domestic debt is in Treasury Bonds.
Therefore ministries, departments and state institutions have been directed to control spending for development projects by cutting down overheads throughout 2022, ministry guidelines revealed.
A ceiling on domestic borrowing is now under consideration due to adverse effects on economic growth and effective usage of public debt is essential for Sri Lanka at present, a senior official of the ministry said.
A large amount of funds was mobilised from the domestic money market by the Central Bank (CB) on behalf of the government to meet debt service requirements as well as to meet essential expenditure of the government.
The CB also provided required financing to the government arising from the shortfall in government revenue and increased expenditure.
Total domestic borrowings will be raised by way of issuing Treasury Bonds, Treasury Bills, Sri Lanka Development Bonds (SLDBs) and Provisional Advance of the CB.
According to the latest data released by the Finance Ministry and published by the CB, the country’s total debt stock had ballooned to Rs.17.05 trillion by the end of October 2021, from Rs.15.12 trillion at the end of 2020, an increase of Rs.1.93 trillion during the nine months
