Sri Lanka’s total external debt expanded by a massive 13.8 percent to US $ 28.4 billion (Rs. 3.5 trillion) last year with private commercial banks also raising loans in international financial markets, the 2012 Central Bank Annual Report reveals.
External debt is defined as the portion of a country’s debt that is borrowed from foreign lenders, including commercial banks, Governments or international financial institutions.
“Total external debt and debt service payments of the country increased in 2012,” the report, released on Tuesday, said. “In US dollar terms, total outstanding external debt, which consists of medium and long term debt and short term debt, increased by 13.8 per cent to US $ 28.4 billion in 2012 from US $ 25 billion in the previous year.”
In 2012, therefore, total outstanding debt stood at 47.9 percent of GDP—up from 42.2 percent of GDP the previous year. This comprises foreign capital inflows to the Government in the form of medium and long term loans, including proceeds of the international sovereign bond, disbursements under the IMF Standby Agreement, foreign inflows to the Government securities market, and medium and long term foreign loans to public corporations.
Meanwhile, the gradual relaxation of exchange control regulations by the Central bank facilitated foreign borrowings by the private sector with 28 companies obtaining approval to raise foreign loans during 2012. This resulted in increased inflows of borrowed foreign capital into the private sector.
The Central Bank said commercial banks raised US $ 973 million by way of long term foreign financing in 2012, including a US $ 500 million international bond issued by the Bank of Ceylon.The report also reveals that the substantial inflows to the private and Government sector in 2012 “were mainly directed to finance major infrastructure projects supporting the long term development goals of the country”.
But economists warned that the Government’s policy of “getting private commercial banks to also borrow on their behalf” was endangering the stability of the entire financial system.
“Our exports also declined in 2012,” pointed out Dr. Muttukrishna Sarvananthan, Principal Researcher of the Point Pedro Institute. “In that scenario, it’s very risky for the Government to push even commercial banks to borrow these large amounts. We may reach a position where we find it very difficult to repay our debts,” he said.
Several economists have warned over the past few months that Sri Lanka is borrowing beyond its means. They point out that a 13.8 percent increase in foreign debt was worse when the country’s GDP only rose by 6.4 percent during the corresponding period.
“If you want proper debt management you have to reduce the absolute amount below GDP in dollar terms,” said one senior economist, requesting anonymity.
“If policies have been successful, imports should fall and exports should rise so that our growth would be higher,” this economist said. “But what has happened is that growth has slipped away. The fall in exports is due to the failure of the Government to introduce economy-wide reforms and refusal to go for GSP Plus.”
“Now banks have been asked to borrow abroad and lend that money to the Government so that foreign public debt wouldn’t rise,” he continued. “But with a high current account deficit, we use up those dollars to pay for imports and, when the country doesn’t have dollars to pay, we reach a critical state.”
The Central Bank report also reveals that 21.2 percent of earnings from the export of goods and services in 2012 went towards foreign debt service payments. This was up from 12.7 percent in 2011—a significant increase, particularly when export income also declined by 7.4 percent during the corresponding period.
“The repayment of medium to long term loans by the Government, particularly the repayment of the US $ 500 million debut sovereign bond issued in 2007 and an increase in interest payments on Government medium and long term loans, including interest and coupon payments on Treasury bills and Treasury bonds, as well as the marginal decline in the export of goods and services in 2012 mainly contributed to this increase,” the report said.