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Sri Lanka continues spending heavily for public debt interest payment

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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.

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