Government debt rises despite restructuring efforts in Q2 2024
Despite finalising debt restructuring agreements with official creditors and International Sovereign Bond (ISB) holders, the government’s total debt marginally increased by 0.25 per cent in the second quarter of 2024, according to the latest quarterly debt report of the Ministry of Finance.
The report highlighted that the government’s total debt reached Rs.100.65 billion by the end of June 2024, up from Rs.100.39 billion at the end of March 2024. This increase caught the attention of analysts, especially given the ongoing debt restructuring efforts.
Domestic debt also saw a marginal rise, climbing to US$57.29 billion in the second quarter, compared to $57.28 billion in the first quarter of the same year. Similarly, the total external debt rose to $37.54 billion at the end of June, up from $37.25 billion at the end of March 2024.
The report detailed the composition of the government’s external debt, with commercial debt representing the largest share at 39 per cent, followed by multilateral debt at 33 per cent, and bilateral debt at 28 per cent. Notably, 85 per cent of the commercial debt was attributed to International Bond Issuances (ISBs), with the remainder coming from Term Financing Facilities, such as Syndicated Loans.
Among the multilateral creditors, the Asian Development Bank and the World Bank were the most significant, accounting for over 87 per cent of the total multilateral debt. In the bilateral debt category, 62 per cent was owed to non-Paris Club countries, while Paris Club countries accounted for the remaining 38 per cent.
A senior official from the Ministry of Finance commented on the slight increase in total debt during the restructuring period, pointing to several contributing factors:
Restructuring Terms: While restructuring typically involves extending loan maturities, reducing interest rates, or offering grace periods, these adjustments can increase the nominal value of the debt over time.
New Borrowing: The need to secure additional funds to cover ongoing expenses or stabilise the economy during or after restructuring can also lead to a rise in total debt.
Currency Depreciation: Significant depreciation of the local currency against foreign currencies in which the debt is denominated can elevate the local currency value of the foreign debt, adding to the overall debt burden.
The official also noted that economic challenges, such as slow growth, reduced government revenues, and increased social spending during the restructuring process, can further strain national finances, leading to additional borrowing.
This report underscores the complexity of managing national debt, especially during periods of economic restructuring, and the need for careful consideration of both short-term and long-term financial strategies.
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