ECONOMYNEXT – Sri Lanka’s government and private borrowers has serviced 2.58 billion dollars of debt in 2023 and 2.48 billion in 2022, the year that the country defaulted on external debt, the Finance Ministry said.
In 2022, central government principal repayments fell to 1,236 million dollars from 2,377 million dollars in 2021 after the default. Interest payments fell from 1,187 million dollars to 465 million dollars.
In 2023, Sri Lanka’s government had made 1,043 million in principal repayments and 405 million dollars in interest payments.
“It is incorrect to say that foreign debt is not being repaid,” the Finance Ministry said.
Banks and private corporations had made principal repayments of 769 million US dollars in 2022, down from 1,410 million in 2021.
Interest payments which were 394 million fell to 273 million dollars.
In 2023 banks and private companies had made 405 million dollars of interest payments.
The data does not include foreign reserve collections both by the central bank and private banks, which are similar to debt repayment.
The central bank had collected reserves while repaying 522 million in debt in 2023 made up 172 million repayment the International Monetary Fund and 350 million dollars in swaps.
While the government’s principal repayments reduced after default, it also did not get new loans from most bilateral lenders except India and the multilateral lenders.
As a result of repaying debt and collecting reserves, from savings made by Sri Lankans, which were not invested domestically, by the credit system, imports of hard goods, mainly building materials and machinery and equipment reduced.
The central bank was able to collect reserves by selling securities held by itself to the banking system (and also repayments of Covid-era re-financed credit).
Banks bought the securities or bought dollars to cover net open position shortfalls using deposits and loan repayments, instead of private credit, reducing building material and machinery imports in particular.
There has been a steep correction in net foreign assets of both the central bank and banks.
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As a result, the external current account turned positive from late 2022, as current inflows were turned into financial account outflows.
Sri Lanka was able to collect dollars and repay debt (and build reserves) because macro-economists were not printing money to target a call money rate claiming inflation was low but was running an interest compatible with the balance of payments, enabling debt to repaid and reserves to be collected.
Analysts had warned that when inflationary open market operations start to target a single policy rate or the average weighted call money rate, the credit system will lose the ability to absorb any external or domestic shock, or even a recovery in private credit, and the price will be paid by social unrest as the exchange rate depreciates through a BOP deficit. (Colombo/Aug16/2024)