Government Addresses Debt Management and Economic Stability
September 14, Colombo (LNW): Sri Lanka’s Finance Ministry has recently clarified misconceptions regarding the country’s debt management and economic stabilization efforts. Contrary to some views, the
Ministry asserts that the current economic stability is not solely due to the suspension of foreign debt payments but is significantly driven by ongoing macroeconomic reforms.
The Ministry explained that not all foreign debt is suspended. The moratorium announced in April 2022 only affected external commercial and bilateral debts, while multilateral debt payments continued as per standard practices.
In 2022 and 2023, Sri Lanka paid USD 2,483 million and USD 2,589 million in debt service, respectively, approximately half of the typical annual payments before the moratorium.
The Debt Standstill was implemented due to a severe decline in foreign reserves, which had fallen to USD 24 million by April 2022. This temporary measure aimed to provide room for negotiating sustainable debt restructuring while managing future payments effectively.
Economic stability is attributed to comprehensive reforms rather than just debt suspension.
These reforms address fundamental solvency issues rather than merely liquidity problems. The IMF-supported reform program, initiated in September 2022, has restored confidence in Sri Lanka’s economic direction, enabling local banks to participate in international trade despite a default status.
Debt restructuring is designed to create sustainable solutions by extending repayment periods and reducing cash outflows, thereby allowing time for economic growth and fiscal stabilization. The goal is to alleviate the debt burden while rebuilding fiscal and external buffers.
Recent reports show a slight increase in Sri Lanka’s total debt. By the end of June 2024, the government’s total debt rose to Rs 100.65 billion, up from Rs 100.39 billion in March 2024.
Domestic debt increased to USD 57.29 billion, and external debt rose to USD 37.54 billion. Commercial debt represents the largest portion of external debt, with 85% attributed to International Bond Issuances (ISBs).
The Ministry attributed the slight increase in total debt during restructuring to several factors:
Restructuring Terms: Adjustments such as extending maturities and reducing interest rates can increase the nominal value of debt over time.
New Borrowing: Additional funds needed for ongoing expenses or economic stabilization can lead to a rise in total debt.
Currency Depreciation: Depreciation of the local currency against foreign currencies can increase the local currency value of foreign debt.
Economic Challenges: Slow growth, reduced government revenues, and increased social spending can strain finances and lead to additional borrowing.
