ECONOMYNEXT – Sri Lanka’s central government debt has fallen to 100.56 percent of gross domestic product by March 2024, down from 104.49 percent, amid economic recovery and exchange rate stability, official data shows.
Sri Lanka’s economy grew 8.4 percent nominally in the March 2024 quarter, taking the rolling GDP up to 28,249 billion rupees from 27,629 as the central bank provided monetary stability through deflationary policy, for economic agents to work and generate value.
The central bank also allowed the rupee to appreciate to 301 by March from 323 in December amid deflationary policy.
Rupee strengthening also reduces the rupee value of dollar debt. Lower prices from currency strength can also increase disposal incomes of the people boosting tax revenues and overall economic activity.
However, if the rupee is appreciated beyond salary hikes already granted to export firms in particular, they may run into problems as it is not possible to quickly boost productivity to maintain competitiveness in the short term.
However most inputs including energy, also falls with a strengthening rupee and future strikes or wage demands may moderate.
The economic recovery in March 2024 was in part due to falling prices from a strengthening rupee, the state statistics office said.
Public debt, with state enterprise guaranteed debt including a central bank credit owed to India fell to 106.81 percent of GDP in March 2024 from 112.74 percent in December.
Central bank debt from India which led to money printed to sterilize interventions (re-financing private sector with printed money against government securities) during the last currency crisis, is fully offset by Treasuries, which is in its balance sheet and already counted in debt.
The central bank is steadily settling the Indian credits with dollars purchased from the market against Treasury bills or deflationary policy.
However some loans taken by agencies like the Road Development Authority have no cashflows to support them and are not actually contingent liabilities.
However other SOE debt including those of Airport and Aviation Services and Ports Authority can settled without using tax revenues.
Public debt with guaranteed state enterprise credit without the central bank’s Indian loan fell to 104.44 percent of GDP down from 109.86 percent in December 2023.
So far the central bank has not engaged in money printing to target a narrow policy rate or exact interbank rate on a net basis, though individual banks have been given printed money to overtrade without deposits from time to time.
Reverse repo operations have re-started over the last few days giving what some classical economists called ‘fictitious capital’ allowing overtrading banks to generate some external instability.
Sri Lanka has a high savings rate of around 25 percent, making it easy to collect reserves or pay down debt as long as monetary stability is maintained and savings are not inflated away through flexible inflation targeting or other doctrines, analysts have said.
Flexible inflation targeting (printing money to generate 12-month inflation of 5 percent or higher without a clean floating regime) and targeting potential output (printing money to push growth) led to external stability and capital flight after the end of a civil war.
Inflationary central bank operations led to forex shortages and reliance on foreign borrowings to settle maturing debt and also a build up of external liabilities at the CPC.
About 2.434 billion US dollars of CPC loans linked to flexible inflation targeting/potential output targeting has since become a tax payer liability and is part of government domestic debt.
East Asian central banks which largely run deflationary operating frameworks attract foreign capital in excess of reserve collections by maintaining exchange rate stability and low inflation by superior operating frameworks which are compatible with reserve collecting central banks. (Colombo/June17/2024)