Sri Lanka’s struggle with rising debt, restructuring
The new administration led by President Anura Kumara Dissanayake faces an immense challenge as it must continue borrowing from the domestic market to address Sri Lanka’s significant budget deficit. Printing money to cover this deficit is not a viable option, according to Finance Ministry sources.
K.M. Mahinda Siriwardena, Secretary to the Ministry of Finance, has emphasised the importance of debt restructuring as a critical step toward managing the country’s growing debt burden.
Mr. Siriwardena pointed out that achieving a sustainable fiscal position requires collecting revenue without placing excessive strain on the public. Despite ongoing criticism regarding the management of domestic debt, he acknowledged the substantial efforts needed to address the issue effectively.
Prof. Wasantha Athukorala from the University of Peradeniya highlighted that from January to August, the previous government borrowed over Rs. 800 billion monthly through Treasury bills and bonds, with some months peaking at Rs. 1,200 billion. This has considerably increased the domestic debt load. In 13 days of this month (October 2-15), the current administration has already borrowed around Rs. 419.2 billion from domestic sources.
Recent data from the Central Bank of Sri Lanka reveals that the country raised Rs. 9.5 billion through bonds, with an additional Rs. 95 billion from 2028 and 2032 bonds.
Foreign investments in Sri Lanka’s government securities have also risen, reflecting confidence in the country’s deflationary policies and a stronger rupee. Foreign holdings in Treasury bills and bonds surged by 15.7 per cent, reaching Rs. 50.6 billion.
Mr. Siriwardena stressed the urgency of gradually reducing the debt burden despite the severe challenges the government faces.
The reliance on borrowing to repay existing loans has intensified the financial pressure on the nation.
He noted that current tax revenues are insufficient to sustain economic growth, calling for critics to focus on how debt management strategies can impact the overall economy.
Between 2020 and 2022, the country’s debt escalated significantly due to high budget deficits, partially financed through money printing, resulting in inflation rates as high as 70 per cent by 2022.
Since 2023, the government has stopped borrowing from the Central Bank for deficit financing, relying solely on domestic borrowing. This shift led to higher interest rates, which consumed about 80 per cent of government revenue in 2023.
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