Tuesday, 21 May 2019 06:05

Public debt estimated at 90% of GDP by end-2018: IMF

Debt increased by weaker economy, rupee depreciation last year
Treasury bills and bonds account for 42% of GDP
Obligations of 42 SOEs estimated to be 11.8% of GDP
CPC, CEB and SriLankan losses account for 1.3% of GDP
With fiscal consolidation, debt can drop to 75.4% of GDP in 2024
External debt 59% of GDP, but can reduce to 56% by 2024
But IMF warns deviating from program could see sharp increase in debt
Chinese loans amount to 15% of Govt. external debt, or 7% of total public debt

Public debt is estimated to have increased significantly to about 90% of GDP at end-2018, the International Monetary Fund (IMF) said in its latest staff report, with losses of State Owned Enterprises (SOEs), particularly Ceylon Electricity Board (CEB), Ceylon Petroleum Corporation (CPC) and SriLankan Airlines, accounting for 1.3% of GDP.

The increased debt reflected weaker economic performance and the sizable depreciation of the rupee as at the end of last year. Based on disaggregated data for 2018, the composition of public debt includes debt owed by the central Government (83.3% of GDP), outstanding amount of loans guaranteed by the central Government (5.2% of GDP), and outstanding Fund credit (1.6% of GDP).

Domestic debt (mostly treasury bills and bonds) accounted for about 42% of GDP. External debt consisted of multilateral and bilateral loans (20.6% of GDP), international sovereign bonds and syndicated loans (15.4% of GDP), and non-residents’ holdings of Treasury bills and bonds (1.1% of GDP).

“Foreign-currency denominated debt accounted for about 50% of total, while debt owed to official and multilateral creditors accounted for about a quarter of the total. Sri Lanka’s debt to GDP ratio remains higher than the median for emerging economies (53%; excluding major oil exporters), and gross funding needs are the third largest among them,” the report said.

The financial obligations of non-financial SOEs are estimated to be 11.8% of GDP based on the latest available data as of end-2017. Sri Lanka has more than 200 state-owned enterprises, and the Ministry of Finance publishes financial performance of 42 non-financial SOEs. Three major SOEs—the Ceylon Petroleum Corporation (CPC), the Ceylon Electricity Board (CEB), and Sri Lankan Airlines (SLA)—recorded a combined loss of 1.3% of GDP in 2018. There is scope to improve the quality of public debt data by adopting the 2014 Government Financial Statistics Manual and publishing audited SOE financial data promptly, the IMF added.

External debt is estimated at 59% of GDP at end-2018. External debt is predominantly owed by the public sector (36% of GDP by the general government and 2% by the central bank). Private external debt remained broadly stable at around 21% of GDP. The ratio of external debt to exports of goods and services is high, at 258% in 2018.

“Although rollover risks remain contained, as 85% of private and public debt is medium or long term, several sovereign bond repayments fall due in 2019–22. More than half of the central Government’s external debt stock is denominated in U.S. dollars. In terms of composition of central Government debt, the largest creditors include the Asian Development Bank (13% of external central Government debt), World Bank (10%), Japan (10%) and China (9%).”

Chinese loans to the Sri Lankan public sector, including SOEs, amount to 15% of central Government external debt, or 7% of total public debt.

The IMF was optimistic that fiscal consolidation envisaged under the ongoing $1.5 billion Extended Fund Facility-supported program would steadily reduce public debt. The consolidation path envisaged under the program scenario is projected to bring down the ratio of public debt to GDP from 90%in 2018 to 75.4% in 2024. The reduction in the debt to GDP ratio beyond 2019 is supported by favourable debt dynamics, with a negative interest-rate-and-growth differential and primary surpluses. Gross financing needs are projected to decrease to 11% of GDP by 2024, as fiscal consolidation reduces the overall deficit and debt amortisation over the medium term.

“Nevertheless, there are significant downside risks to the program scenario. If fiscal consolidation were to stall and the primary balance to return to its historical level (-1.5% of GDP), the debt-to-GDP ratio would remain at about 90% until 2024.”

Debt reductions would become less significant under individual shock scenarios on primary balance (lower primary surplus by 0.5 percentage points of GDP for 2019–20), GDP growth (2 percentage points lower than in the program scenario for 2019–20), the exchange rate (15% real depreciation in 2019 vis-à-vis the program scenario), and the interest rate (an increase by 300 basis points for new borrowings during 2018–21 vis-à-vis the program scenario). When these shocks are combined, the debt to GDP ratio would reach 97% in 2024.

Similarly, in a SOE-related customised contingent liability shock scenario where the central government becomes liable for additional debt of 7% of GDP in 2019, the debt to GDP ratio would initially jump to 99% of GDP and gradually decline to 92% of GDP in 2024. In the combined shock scenario and the contingent liability shock scenario, gross financing needs would remain elevated at 15% of GDP in 2024. Also, the debt level is high relative to revenues, constraining repayment capacity. In terms of the realism of baseline assumptions, the envisaged improvement in the cyclically-adjusted primary balance of around 3% points of GDP over 2019−24 is higher than in 74% of international experiences, highlighting the challenges of the fiscal consolidation plan.

The ratio of external debt to GDP is projected to gradually decline over the medium term. Under the program scenario, external debt is projected to decrease from about 59% of GDP in 2018 to around 56% in 2024. The decline is driven by GDP growth, a steady pace of fiscal consolidation, and gradual current account adjustments.


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