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Sri Lanka should watch debt, contingent, liabilities: IMF
26 Feb, 2013 07:55:44
Feb 26, 2013 (LBO) - Sri Lanka should be careful about mounting external liabilities and reserve adequacy, with national debt already on the "high side" at over 80 percent of gross domestic product, the International Monetary Fund has said.
Sri Lanka's official debt to GDP ratio is expected to climb slightly to 81 percent in 2012 from 78.5 percent last year after the economy slowed following a balance of payments crisis triggered mainly by credit taken to subsidize energy tariffs.

The debt to GDP ratio is down from the nearly 100 percent levels seen a decade ago.

"But at 80 percent of GDP it is on the high side," IMF mission chief to Sri Lanka John Nelmes said earlier this month.

"It is something that will require attention which will require fiscal consolidation, which is the government's aim.

"Our debt sustainability analysis shows that under baseline scenarios of those ratios should decline."

Nelmes says Sri Lanka is now being compared to emerging markets that are "more advanced."

"Now what we are really doing shifting the comparison of Sri Lanka towards a group of countries that are more advanced. so in essence we are looking at a more optimistic set of comparator countries.

"So these are comparisons that one wants to think about. Not in the immediate future but over the course of a period some time."

Contingent Liabilities

About 47 percent of that debt was foreign or denominated in foreign currency, up from 44 percent a year earlier.

But about 12 percent of the rupee denominated debt is also held by foreign investors.

Though overall debt ratios have been stable, contingent liabilities, both foreign and local have been mounting.

Authorities have said that Sri Lanka's national debt cannot be directly compared to some other countries because most of the funds are passed through the budget whereas in some other counties spending agencies borrow direct.

Sri Lanka spending agencies including road and urban development agencies have started to borrow on their own account outside the budget, which tend to understate the overall budget deficit and the national debt.

As of numbers released last year close to about3.8 percent of GDP is sovereign guarantees have been issued by the finance ministry to various lenders, including foreign banks which have given loans to loss making entities such as SriLankan Airlines.

The administration would also lift a 4.5 percent of GDP ceiling on sovereign guarantees set by a fiscal responsibility law, according to the latest budget.

Nelmes says attention need to b paid to contingent liabilities.

"It needs to be kept in mind that if there are either sovereign guarantees or exchange rate guarantees that are being considered that also has to be taken into consideration when one thinks about debt sustainability," he said.

Sri Lanka's central bank has conducted several hundred million US dollars worth of foreign exchange swaps, which are exchange rate guarantees with various lenders who were encouraged to borrow abroad.

The budget this year said two development lenders are expected to borrow 250 million US dollars each. Other lenders have been allowed to borrow up to 50 million US dollars.

At least one state bank is expected to go to international markets with a 500 million US dollar bond which will be re-loaned to the state. In the past such money has been given through so-called Sri Lanka Development Bonds and is captured as dollar debt.

"As the financial sector matures and grows it would be normal to see that financial sector starts accessing other forms of debt," Nelmes said.

"I think that in this point in time from a more macro perspective it is useful to think about it from a balance of payments perspective. And to improve the balance of payments to bring financial from abroad for balance of payments, more in terms of direct flows.

"So FDI, (foreign direct investment) rather than more debt."

Reserve Adequacy

Sri Lanka has foreign reserves of 6.8 billion US dollars. Measured in months of imports it is around 3.5 months worth.

"Often times it is thought anything above three months imports is adequate," Nelmes said.

"But there are many other measures. Another measure that is commonly looked at is a ratio of international reserves to short term debt that is maturing in less than a year.

"A typical rule is that international reserves should be 100 percent of that debt. At the end of 2012 reserves here were below 100 percent of short term debt. That would argue for increasing international reserves."

About 2.5 billion US dollars has to be repaid to the IMF over the next several years by the Central Bank, starting with 322 million special drawing rights (about 500 million US dollars) this year on a stand-by loan which ended last year.

Sri Lanka abandoned a plan to borrow around billion US dollars through a follow up program saying the money was needed by the Treasury not the Central Bank.

The Central Bank however can also build up reserves by selling down its Treasury bill stock and reducing domestic credit given time.

Other analysts have pointed out that as long as the Central Bank is prepared to sterilize the balance of payments to maintain interest rates through credit creation no amount of reserves will be 'enough'.

A central bank that injects liquidity (prints money) to sterilize foreign exchange sales to keep interest rates down can run down any amount of foreign reserves within a few months.

A central bank that only engages in unsterilized interventions on the other hand, can manage with a little reserve cover over its monetary liabilities, typically the domestic monetary base.

Analysts have pointed out that more than dollar denominated market debt which are traded outside the domestic rupee banking system and cannot trigger what is usually referred as a 'balance of payments crisis'.

During a period of crisis, the yields demanded on dollar denominated debt will rise, inflicting losses on their holders when they try to sell out to other dollar holders. The domestic exchange rate and interest rates are not much affected.

Under Sri Lanka's monetary and fiscal arrangements it is possible to settle maturing foreign loans out of central Bank reserves without affecting the domestic monetary base.

But when domestic currency bond holders try to exit by selling to domestic buyers, the rupee credit system is immediately hit by rising interest rates, to which authorities usually respond by sterilizing the balance of payments.

Unwinding dollar swaps by the Central Bank with domestic lenders also involve the domestic monetary base.

Update II

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2. allen Mar 01
That the difference between japanese debt and chinese debt..

Japan give loan for upper kothmale.. which saves money cash to SL...

China give loans for dead ventures...

1. slam Feb 26
No more imf debt ..
all debt used for non value generating projects..

Port = no revenue
airport = no revenue
building pavements and beautification of city = no revenue