by Our Economic Affairs Editor
A latest report by the International Monetary Fund (IMF) highlights pressing concerns about Sri Lanka’s public debt management systems, underscoring critical deficiencies in the nation’s legal and institutional frameworks. The findings emerge as the country navigates ongoing economic turbulence and seeks to align with commitments under the IMF’s Extended Fund Facility Arrangement and World Bank’s Development Policy Operation.
The report, developed following a joint IMF-World Bank technical assistance mission in early 2023, critiques the fragmented and outdated public debt management (PDM) mechanisms. It calls for sweeping legal and operational reforms, including the establishment of a consolidated Debt Management Office (DMO) within the Ministry of Finance (MoF).
Controversial Findings: Legal and Structural Gaps
Among the most contentious revelations, the report details significant ambiguities in Sri Lanka’s legal framework for PDM. Current laws fail to define critical elements such as the scope of public debt and the term “government,” resulting in uncertainties over whether extrabudgetary units and other public sector entities fall under central government debt calculations. This lack of clarity poses a severe risk to fiscal transparency and accountability.
Additionally, the legal framework lacks mandates for key practices such as medium-term debt management strategies (MTDS) or their approval by the government’s highest authorities. Such omissions undermine the coherence and sustainability of the nation’s debt management efforts.
Institutional Fragmentation and Operational Inefficiencies
The report identifies operational inefficiencies stemming from a fragmented institutional framework. Domestic debt is managed by the Central Bank of Sri Lanka (CBSL), while external borrowing falls under the purview of the MoF’s External Resources Department. This duplication not only hampers coordination but also leads to delays and gaps in public debt reporting. Notably, the last published MTDS was in 2019, and there is no consistent publication of borrowing plans or consolidated debt data.
The absence of a policy framework for managing government guarantees and on-lending is another red flag. With no mechanisms to evaluate creditworthiness or manage default risks, guaranteed loans to state-owned enterprises (SOEs) and on-lending practices remain opaque. Legal limits on guarantees have reportedly been breached, exacerbating concerns about fiscal oversight.
Recommendations for Reform
The IMF has proposed a series of urgent reforms to address these challenges:
- Legislative Overhaul: The introduction of a new PDM law to consolidate and define governance structures, debt objectives, and accountability mechanisms. This law would embed requirements for MTDS and annual borrowing plans, bolstered by annual parliamentary reporting.
- Establishment of a Centralized DMO: The DMO would reside within the MoF, given Sri Lanka’s current lack of preconditions—such as a stable macroeconomic environment and a developed domestic debt market—for an independent statutory body.
- Improved Debt Transparency: Consolidating debt data systems, establishing clear policies for government guarantees, and enhancing public disclosures on debt and borrowing activities.
- Streamlining Institutional Roles: Narrowly focusing the DMO on PDM functions while retaining non-borrowing tasks in a separate department.
Government Response and Challenges Ahead
Sri Lankan authorities have expressed agreement with the IMF’s recommendations and have committed to drafting the new PDM law as a priority. However, implementation challenges loom large. Experts caution that political will, institutional resistance, and capacity constraints could delay meaningful progress.
This report comes at a critical juncture for Sri Lanka, which faces mounting fiscal pressures and an urgent need to regain investor confidence. Without prompt and decisive action, the country risks further erosion of public trust and economic stability.
