SL’s external debt service ratio ‘heading for danger zone’
Posted on May 1st, 2015

By Ifham Nizam  Courtesy Island

As the Central Bank of Sri Lanka readied to receive the first USD400 million tranche from India, a top Lankan economist warned that the country’s external debt service ratio is moving towards a danger zone and has already entered the statistical ‘amber-light warning zone’.

Pathfinder Foundation, deputy chairman, economist Dr. Indrajit Coomaraswamy, in his comprehensive presentation on “Power and Energy” at a workshop titled `Downstream Petroleum Industry –supply, quality, pricing and regulatory issues’ at the Kingsbury on Monday also revealed that Sri Lanka urgently needs to promote both FDI and an export-led growth model to stabilise at an eight per cent GDP growth rate.

The warning on increased foreign borrowings came as Sri Lanka’s Central Bank readied to receive the first USD 400 million tranche from India under a “currency swap agreement” with the Reserve Bank of India to stabilise the rupee and promote exports.

“Over the last five years, Sri Lanka’s growth model has been based on commercial external borrowing – led infrastructure development. The headroom for continuing this model is now severely constrained due to the fragile debt dynamics.  The debt to GDP ratio is 75% – countries with the same rating as Sri Lanka have a median of 44%.

“External debt service ratio is 25% – the ‘rule of thumb’ is that anything above 20% is ‘amber light territory’ said Coomaraswamy.

Sri Lanka’s external debt has been climbing steadily due to increased foreign borrowings. In 2013 external debt stood at USD 39 billion. In 2014 Sri Lanka’s exports of merchandise and services were recorded at USD11.9 Billion. Also merchandise only exports for January and February stood at USD 1.75 billion.

“Total debt servicing absorbs all government revenue. This means that every cent of public expenditure beyond debt-servicing has to be financed through domestic and foreign borrowing. The new growth model would need to be private investment – led export expansion. FDI would have to play a major role he added. Coomaraswamy also said: “If one is to achieve the growth target of 8%, one requires investment to be 34% of GDP. It is currently 29 %. Given the country’s debt dynamics the shortfall of 5% of GDP is best filled through non-debt creating flows, particularly FDI. The other option is to squeeze consumption which is not politically feasible in a democratic system. The challenge will be to increase FDI from its current USD 1 billion level to about USD $3.5 – 4 billion a year.

“Not only does FDI fill the savings – investment gap but it also brings with it technology, markets and knowledge. With a domestic market of 21 million people, one cannot sustain accelerated 8% growth for 10 – 15 years without export expansion.

“All the successful countries in East and South East Asia have adopted the export – led growth model. It is important to sustain 8% + growth over 10 – 15 years or even more. This was achieved by these successful countries. China achieved an average growth rate of 9.3% over the last 30 years – unprecedented in human history. Sri Lanka has proximity with India and excellent relations with China which can and should be leveraged.”

 

2 Responses to “SL’s external debt service ratio ‘heading for danger zone’”

  1. Christie Says:

    Namaste: The Indian Empire has already promised more than a billion dollars. Jai Hind

  2. Dilrook Says:

    $1.5 billion Indian loan comes with terrible conditions attached. One such condition is to sign the CEPA agreement. That will wipe out most large Sri Lankan industries that make profit. Unlike the previous government, the current government is unable to say no to India. As a result, CEPA will come into force and ruin the economy.

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