Sri Lanka’s Debt Reaches Over $100 Billion Amid Ongoing Economic Struggles

The financial situation has deteriorated since the economic collapse caused by fiscal mismanagement and policy errors.

2 mins read
Political instability will pose risks to the implementation of reforms and the distribution of IMF funding, even if a debt restructuring is agreed. This representational photo shows a view of Colombo City [Photo: Tharaka Katugampola]

Sri Lanka’s national debt has surged past $100 billion, reflecting the country’s ongoing economic challenges and efforts to stabilize its finances. The latest figures reveal that unpaid principal and interest now exceed $6.4 billion, highlighting the severity of the fiscal crisis.

According to the Ministry of Finance, Economic Stabilisation, and National Policy, as required by the International Monetary Fund (IMF), Sri Lanka’s total debt stands at $100.18 billion. The first quarter data shows a nearly 9% increase in domestic debt, which has grown from $52.64 billion in December 2023 to $57.28 billion.

The situation remains dire with more than $12 billion of International Sovereign Bond (ISB) debt unpaid, including a $500 million ISB due for payment later this month. The Asian Development Bank (ADB) and the World Bank hold a significant portion of the country’s multilateral debt, amounting to $10.5 billion, with the ADB owed $6.2 billion and the World Bank $4.3 billion.

Since suspending external debt servicing to bilateral and commercial creditors in April 2022, unpaid debt service has accumulated to $4.45 billion, with unpaid interest reaching $2.08 billion by the end of the previous year.

The financial situation has deteriorated since the economic collapse caused by fiscal mismanagement and policy errors. In the last quarter of 2023, the total debt was recorded at $96.17 billion, reflecting the ongoing struggle to manage the nation’s finances effectively.

The ADB and the World Bank have been pivotal in providing economic support and financing critical projects. They have also played a crucial role in helping the country manage its financial risks and liquidity. The World Bank, for instance, financed essential imports like cooking gas with a $70 million loan to Litro Gas and provided $500 million in budget support, including funds for the ‘Aswesuma’ cash support program.

Moreover, the IMF is owed $672.3 million as Sri Lanka grapples with its debt obligations. The country’s debt-to-GDP ratio was 103.9% in 2023, indicating a significant burden on the economy.

Sri Lanka’s debt obligations extend to several international and bilateral creditors, including European and Asian governments and various international banks. Notably, China Development Bank is owed $2.18 billion, Japan $2.35 billion, and South Korea $294.6 million. The country also owes substantial amounts to banks like HSBC and Standard Chartered.

Unpaid ISBs due in 2023 include a $1 billion bond and a $1.25 billion bond, both of which have not been settled due to the ongoing debt service suspension. Another $500 million ISB is set to mature this month.

Despite the government’s efforts to manage domestic debt through Treasury bond and bill exchanges, the challenges remain significant. The World Bank has stressed the need for a comprehensive debt restructuring to restore sustainability, warning of high downside risks.

Sri Lanka’s gross financing needs have been exacerbated by high domestic interest rates, leading to increased government expenditure, which rose by 19.8% to Rs 5.35 trillion in 2023.

External debt service payments totaled $2.58 billion in 2023, slightly higher than the $2.48 billion in 2022. This increase follows the suspension of selected government debt payments since April 2022.

The country’s economy contracted by 2.3% in 2023, following a 7.3% shrinkage in 2022, underscoring the severe impact of the financial crisis on its economic stability.

This report is based on data and analysis provided by The Sunday Times, Colombo.

SLG Syndication

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