The Ministry of Finance emphasizes that with a high annual budget deficit, the government cannot print new money to cover the gap, leaving no other option but to borrow from the local market.
In response to allegations that the newly appointed President Anura Kumara Dissanayake’s administration has taken significant loans from both local and foreign markets, K.M. Mahinda Siriwardena, Secretary to the Ministry of Finance, addressed these concerns.
Recalling the historical trend of various governments facing high budget deficits annually, the Secretary highlighted that to reduce the debt burden, a successful debt restructuring process is essential. He also noted that tax revenues should be collected efficiently, ensuring the government can sustain its financial responsibilities without being overly burdened. Although some individuals have personal agendas and offer harsh criticism of the government’s domestic debt levels, managing this debt is a significant challenge for the administration.
The Secretary stressed that one must manage public perception and criticism effectively, regardless of what detractors may say.
Between 2020 and 2022, government debt increased significantly due to larger annual budget deficits. Much of this borrowing was financed by the central bank through deficit financing (commonly referred to as money printing), a highly inflationary practice that contributed to inflation peaking at a record high of around 70% in 2022.
However, from 2023, the government stopped borrowing from the central bank to finance the deficit, instead relying entirely on the domestic market for necessary loans. This shift resulted in rising interest rates as borrowing increased. In 2023, the government’s interest expenses amounted to about 80% of total revenue. Despite achieving a primary surplus of 0.6%, the overall budget deficit stood at 8.3%.
Since then, interest rates (specifically yields on Treasury bills) have dropped back to single-digit levels, reflecting the government’s successful fiscal management. Debt burdens are expected to ease further as the economy grows and real interest rates remain low.
The government is currently restructuring its debt, which will help reduce the debt servicing burden. The debt restructuring strategy involves gradually repaying unpaid loans and interest during the moratorium period, thereby easing the strain on public finances.
Challenges persist in debt restructuring, as a large proportion of domestic debt is held by local institutions like state-owned banks and pension funds such as the Employees’ Provident Fund. The Domestic Debt Optimization Operation implemented in 2023 helped alleviate the financial burden to a large extent. However, further restructuring of debt held by domestic institutions could have significant economic and social implications.
Government revenue, expenditure, and the budget deficit need to be considered holistically. Deficit financing and debt relief are complex and nuanced processes with multiple factors at play. Relying on a simplistic or flawed analysis of a single metric to explain complex issues is misleading. Such approaches have been used in the past to misinform the public and are one of the reasons for Sri Lanka’s current economic crisis. The Secretary emphasized the importance of learning from past mistakes and ensuring that future decisions are guided by professional analysis and evidence-based judgments.
— Jayasiri Munasinghe