Sri Lanka is continuing to spend a substantial amount of its earnings for its interest payment on public debt this year, Finance Ministry data shows.

This will be burden for the interim budget 2022 which will be presented in parliament next month in which the total expenditure is estimated to be more than double that of the income

The interest expenditure on public debt will be the largest item in all previous budgets presented in parliament during the past several decades up to now, senior official of the finance ministry divulged .

Sri Lanka’s debt-to-GDP ratio is increasing alarmingly owing to high interest payments, limited access to global financial markets, and dwindling revenues.

The overall revenue performance of the Government improved during the first four months of 2022 benefiting from the mobilisation of both tax and non-tax revenue, compared to the subdued revenue performance of the same period in 2021

According to finance ministry provisional data, the interest payment will come down to 20 -30 percent of the revenue this year from the previous level of 66 to 70 percent as the treasury will have to service only domestic borrowings following the decision to suspend foreign debt servicing.

He added that it is high time to take the initial step towards halting the seven decade practice of financing national budgets through borrowings although it will be a gigantic task.

High rise in the interest cost-to-revenue ratio was driven primarily by the decline in government revenue.

High interest payment also reduces spending on priority areas such as education, health, and social protection.

Interest payments, along with salaries and pensions, are an example of Sri Lanka’s high levels of non-discretionary public expenditure, which are not easy to reduce in the short term.

Therefore, revenue enhancement measures will play a key role in efforts to curtail the budget deficit.

The total expenditure on interest payments including both domestic and foreign debt increased by 16.5 percent to Rs. 426.8 billion in the first four months of 2022; compared to Rs. 366.2 billion in the same period of 2021, latest finance ministry fiscal report revealed

Interest payments on foreign debt fell by 8.1 percent to Rs. 84.9 billion in the first four months of 2022, compared to Rs. 92.4 billion in the same period of 2021 whereas interest payment for domestic debt increased by 24.8 percent to Rs. 341.9 billion in the first four months of 2022 from Rs. 273.8 billion in the same period of 2021.

Sri Lanka’s interest cost increased by Rs. 78 billion compared to 2019, reaching Rs. 980 billion in 2020. However, government revenue declined even further by Rs. 522 billion compared to 2019, to Rs. 1,368 billion in 2020, finance ministry data revealed.

To be more exact out of every Rs100 in government revenue Rs 30 to Rs 67 is drain off to service the interest on public debt during the past several years., ministry official explained expressing optimism this will reduce to some extent this year.

According to provisional estimates the interest payment will come down this year following the government’s decision to suspend foreign debt servicing. .

Sri Lanka has the highest interest cost as a percentage of government revenue, reaching an unprecedented level of 71.7percent in 2020.while treasury paid more than two-thirds of its revenue as interest cost.

In 2020, Sri Lanka’s interest cost increased by Rs. 78 billion compared to 2019, reaching Rs. 980 billion in 2020.

However, government revenue declined even further by Rs. 522 billion compared to 2019, to Rs. 1,368 billion in 2020.

Indian and Sri Lankan authorities are now working towards the finalisation expeditiously of the much delayed and widely debated Economic and Technology Co-operation Agreement (ETCA), which will out strip the existing free trade agreement (FTA) entered in to in March 2000, Trade Ministry sources confirmed.

The conclusion of ETCA negotiations has been delayed for five and half year period since 2016, as it was opposed by professional bodies, particularly in the IT and healthcare sectors who alleged that it would give preference to Indian workers displacing skilled Sri Lankans.

It was initially scheduled to be signed in 2016 when President Ranil Wickremesinghe was the prime minister at that, time; senior trade ministry official said adding that it is expected to address larger issues of market access and asymmetry in two-way trade.

According to the Commerce Department of the Trade Ministry, there has been no progress in negotiations between India and Sri Lanka with regard to the controversial ETCA since the last round of bilateral talks in October 2018.

Preliminary discussions on the ETCA were held in 2015 during the Fourth Commerce Secretary-level talks between the Indian and Sri Lankan sides in New Delhi where this agreement was proposed.

The high ranking official of the Commerce Department noted that 11 rounds of bilateral negotiations were conducted, with the first round held in August 2016 and the last and 11th round in October 2018.

The 12th round of negotiations which were scheduled to be held in September 2019 was postponed pending cabinet approval.

This was due to a new regulation introduced by the then Ministry of Development Strategies and International Trade (MoDSIT), which had made Cabinet approval compulsory to conduct negotiations for any trade agreement, he explained.

The importation of good from India to Sri Lanka was at a very low level under the free trade agreement during the past few years due to heavy taxes on Indian imports which was not covered under the FTA.

Further Indian imports were subjected to other levies and duties in addition to customs duties such as the cess levy and the Ports and Airports Development Levy (PAL), he pointed out.

However, the growth of exports to India from Sri Lanka has been sluggish due to the non-tariff barriers imposed by the Indian authorities, which include un necessary regulatory requirements, he added.

The ETCA initiative follows unfruitful negotiations on a Comprehensive Economic Partnership Agreement (CEPA) between the two countries.

The India-Sri Lanka Free Trade Agreement of 1998 was followed by efforts towards CEPA to liberalise trade in services and investment starting in the mid-2000s.

However, the CEPA negotiations dragged on for nearly a decade in the face of wide spread opposition particularly by the business community and finally the then government had to abandon the negotiations under pressure.

Sri Lanka government has devised a methodology to provide additional duty concessions extended for Sri Lankan migrant workers based on the amount remitted through official banking channels.

The objective is to boost foreign exchange inflows through the banking system to overcome the foreign exchange crisis, Labour and Foreign Employees Minister Manusha Nanayakkara disclosed.

As per the Minister, the allowance will be provided to be utilised upon the arrival of the migrant workers at the airports.

“The ministry will maintain the existing system, which extends a duty concession up to US$ 187 to any Sri Lankan who returns to the country in less than 90 days.

In addition to that, migrant workers returning to Sri Lanka between 90-365 days will be provided with an allowance of $ 625, while those returning after over a year will be given an allowance of $ 1,750,” he said.

However, following the new Cabinet decision, the Ministry has now introduced three categories as Silver, Gold, and Gold plus.

“Those who have remitted $ 2,400 within one year via official banking channels will be included in the silver category. Among this category, those returning within 90 days will be provided with an allowance of $ 787, those returning within 90-365 days $ 1,252, and those after one year $ 2,350,” Nanayakkara said.

He also said migrant workers who have remitted $ 4,800 for a period of one year through official banking channels, those below 90 days will be provided with an allowance of $ 1,175, those between 90-365 days $ 1,585, and those over a year will be $ 2,710.

“Migrant workers who have remitted $ 7,200 for one year will be included in the gold category. Among this category, those with less than 90 days will be provided with an allowance of $ 1,627, those between 90-365 days with $ 2,650, and those over a year $ 3,190,” he added.

The Minister said migrant workers who have remitted $ 12,000 will fall under the gold plus category.

“Those with less than 90 days will be provided with an allowance of $ 2,587, those between 90-365 days with $ 3,025, and those over a year will be provided with an allowance of $ 4,150,” he said.

He also said for migrant workers who have remitted $ 24,000 for a period of one year, those with less than 90 days will be provided with an allowance of $ 4,985, those between 90-365 days with $ 5,425, and those over a year $ 6,550.

The Cabinet of Ministers also approved providing a licence to import an electric vehicle equivalent to 50% of remittances.

If a migrant worker had remitted over $ 3,000 either to their bank account or to family members, they can buy an electric motorcycle equivalent to half of the money sent. The minimum amount is $ 3,000 and this permission is not available for the purchase of three-wheelers,” he explained.

Accordingly, the Government has allowed importing electric vehicles if a migrant worker has remitted $ 20,000 to a maximum of $ 65,000.

“These imported vehicles should be in the range of 300-500 km. The electric vehicles must be charged by a solar-assisted power charger installed by themselves without burdening the national power grid,” Nanayakkara said.