COLOMBO – Sri Lanka’s government debt had climbed to 104% of gross domestic product (GDP) by June 2021 from 101% in December 2020, based on the latest national income estimates and debt data.
Sri Lanka’s nominal GDP for the 12 months ending June was Rs 15.9 trillion, while total debt had grown to Rs 16.56 trillion.
Foreign debt in rupee terms went up to 6.63 trillion, from 6.0 trillion, despite a net payback of rupees as the currency fell.
A falling rupee tends to make foreign debt rise, though the GDP can also inflate later as the currency falls.
The increase in central government debt does not take into account the fall in foreign reserves, which makes net debt go up.
The central bank has also been entering into swaps taking on additional debt.
When central government loans are repaid with central bank swaps, debt is effectively transformed from the Treasury to the central bank balance sheet.
Sri Lanka has seen net foreign debt rise whenever money is printed to keep down rates, triggering forex shortages and the country loses the ability to settle loans using current external receipts.
The phenomenon was seen in 2015/2016, 2018 and 2020, analysts have shown.
Sri Lanka’s national debt has grown steadily under so-called revenue-based fiscal consolidation where cost-cutting (state-austerity) was discouraged, spending to GDP was ratcheted up and the burden of higher spending was passed on to productive sectors.
Classical economists call the attempt to achieve budget balance by raising taxes the ‘statistical’ methods.
“This alternative is beset with pitfall,” classical economist B. R. Shenoy said in 1966 when Sri Lanka’s revenue to GDP was 20 and money was printed to cover what he called the ‘net cash deficit’.