What we need to know about Sri Lanka’s Debt Restructuring including ‘As long as the country faces a budget deficit, borrowing is necessary’ – CBSL Governor

In a recent interview, Governor of the Central Bank of Sri Lanka Dr Nandalal Weerasinghe addressed misconceptions regarding Sri Lanka’s total debt, clarifying that the increase from USD 96 billion in December 2023 to a projected USD 100 billion by March 2024 is largely due to exchange rate fluctuations rather than new borrowing.

Joining an interview held at the Presidential Media Centre on Friday (05), the CBSL Governor said that despite a detailed explanation of this made by President Ranil Wickremesinghe in Parliament recently, some have mistakenly interpreted the rise as an increase from USD 70 billion to USD 100 billion.

Commenting in this regard, Dr. Weerasinghe added: “The status of the debt as of March 2024 was outlined in the Debt Bulletin you referenced. The entire loan amount is denominated in US dollars, totaling USD 100 billion. As you know, our country manages both domestic and foreign debts, with foreign loans typically in dollars. 

“When including domestic debt in the table, it is converted into dollars. Previously, our exchange rate was 324, but it is now 301. Consequently, the foreign exchange position has strengthened, which is favorable. However, the higher exchange rate increases the dollar value of our debt in rupees. Thus, despite no additional borrowing, the debt appears higher due to the exchange rate fluctuation”, he expressed.

Meanwhile, the CBSL Governor also expressed: “additionally, is it beneficial or detrimental to defer debt repayment? When a country progresses, a budget deficit inevitably arises if expenditure exceeds income. This deficit necessitates borrowing. We are not alone in this; other countries also borrow. This on-going process leads to automatic increases in loans.”

Furthermore, he highlighted that the challenge lies in maintaining debt at a sustainable level. 

“Can borrowing continue, and if so, from where? Should loans come from the central bank? As you know, the central bank prints money, and we understand the implications of excessive money printing. Should we continue this to cover budget deficits? Should we increase or reduce our credit?”, he questioned. 

Dr. Weerasinghe, who stated that achieving debt sustainability entails managing debt at a level sustainable for the country, mentioned that strengthening public financial management is essential alongside debt restructuring. 

The CBSL Chief pointed out that Sri Lanka must manage our finances prudently, emphasizing revenue growth and maintaining manageable expenses. 

“By striking this balance, we can sustain a manageable budget deficit and progress forward”, he added.

“I do not agree with those who argue against borrowing. As long as our country faces a budget deficit, borrowing is necessary. This has been a historical reality and will persist in the future, similar to other countries’ practices”, said the CBSL Governor.

“Moreover, expenditure must align with income. For instance, approximately 80% of our income goes toward loan interest, leaving 20% for other expenditures. This proportion represents 19-20% of gross production costs, yet our income was only 8% in 2022, resulting in a 12% budget deficit. We have since increased income to around 11%, reducing the deficit to 8%, which is progress. Our expenditure is not the primary concern; rather, income must be bolstered. Despite this improvement, satisfaction remains elusive. Under the IMF program, we aim to raise income to 15%, while capping costs at approximately 5%.”

“My message to the country is clear: I disagree with claims that a country can function without borrowing. However, loans must be utilized for productive purposes and non-consumptive economic activities. By channeling loans into investments that stimulate economic growth, we can enhance debt repayment capabilities. Debt accrues through a complex process, and comparisons should consider the financial context in which loans are secured”, Dr. Weerasinghe said.

Interview source: AdaDerana