ECONOMYNEXT – Sri Lanka’s central government debt fell to 101.8 percent of gross domestic product in September 2024, down from 105.49 percent in December 2023, based on latest official data.
Rolling annual GDP was 29,146 billion rupees based on the third quarter data released by the Department of Census and Statistics.
Central government debt went up to 30,025 billion rupees in September 2024 from 29,146 billion in December 2023.
Foreign debt fell to 11,699 billion rupees in September 2024 in rupee terms, from 12,094 billion rupees in December 2023.
Domestic debt rose to 18,326 billion rupees in September from 17,052 billion rupees.
Sri Lanka’s central bank has kept broadly deflationary policy up to the September 2024, allowing maturing foreign debt to be paid while collecting reserves.
Deflationary policy also allows the central bank to repay debt it has taken from the Reserve Bank of India.
However, concerns have been raised that the central bank has started to print money to target a single policy rate, which will eventually lead to a balance of payments deficit, triggering a loss of ability to collect dollars to repay debt or build reserves.
In the run up to the crisis the central bank also used swaps to create money, instead of creating money against domestic assets which is normally called ‘money printing’ in a reserve collecting central bank.
Rates suppressed with new money from swaps however have the additional danger of leaving the central bank with large forex losses as the reserves lost to the liquidity is not owned by the central bank.
There is as yet no law in Sri Lanka to outlaw the creation of money through swaps to de-stabilize the banking system.
Borrowed central bank dollars from the domestic market also figured in the collapse of the Lebanese Pound.
Central bank swaps were originally invented by the Federal Reserve in the process of busting the Bretton Woods system.
Excess liquidity in banking system has risen to high levels. Stock market is also hitting record levels as low rates makes margin loans with newly created money attractive.
Sri Lanka has gone through several similar cycles under ‘flexible inflation targeting’ and ‘mid-corridor targeting’ with excess liquidity since the end of a civil war, ending in sovereign default. (Colombo/Dec18/2024)