The government has substantially reduced its foreign debt to GDP ratio due to timely measures taken by the Government and the Central Bank, said Central Bank Governor Prof. W. D. Lakshman responding to concerns raised by individuals and media about an assumed shortage of foreign currency liquidity in the domestic market, preventing banks from facilitating imports.
He said as a result of the measures taken by the in the past one-and-half years the Government has substantially reduced its foreign debt to GDP ratio to about 40 percent and the face value of foreign debt from USD 34.1 billion at end 2019 to USD 32.2 billion by end March 2021, while successfully meeting its maturing debt service obligations.
“To enable the country to perform this formidable task amid reduced foreign currency inflows, Sri Lanka introduced measures to rationalise selected non-essential imports.
Some of these restrictions have been gradually removed, although the Central Bank is of the view that there is further space to curtail nonessential and non-urgent imports, given the continued challenges emanating from multiple waves of Covid-19,” the Governor said.
However, according to former Central Bank Deputy Governor Dr. W.A. Wijewardena, Sri Lanka had had two financial crises in the past; the first in 1988 in the wake of the JVP insurrection and the second in 2008 when the war with LTTE had escalated to a point of no return; on both occasions, the IMF bailed out Sri Lanka which had given a solemn promise to the Fund that it would sustain the recovery and move into a long term growth path by introducing reforms: reforming the Budget, improving exports, making SOEs viable and creating an environment conducive for private sector to do business by deregulating the economy. On both occasions, Sri Lanka did not keep its promise and the result was a degeneration to a low level.
“Today, there’s no option but to seek the Fund’s assistance. It’s not a loss of face because Sri Lanka is a member of the IMF and the Fund is there to help members in trouble,” Dr. Wijewardena said.
Sri Lanka’s debt obligation continues with an International Sovereign Bond (ISB) of USD 1 billion coming up for payment on July 27.
Sri Lanka has to settle USD 29 billion in foreign-currency debt over the next five years (2021-2026) while the country had only around USD 4.5 billion in foreign reserves at the end of April.
The foreign reserves had plummeted to USD 4 billion by last month.
According to rating agencies, foreign reserves would be in the range of USD 4.5 billion by the end of the year and would drop to around USD 3.9 billion by the end of next year.
Fitch estimates Sri Lanka’s debt to GDP ratio to increase to about 100% this year from 86.8% in 2019, and to rise further under our baseline scenario to around 116% in 2024.