Sri Lanka’s Public Debt Growth Slows in 2024: A Closer Look

Sri Lanka’s public debt growth has shown signs of deceleration in 2024, providing a glimmer of hope for better fiscal management amidst ongoing economic challenges. According to the latest Debt Bulletin from the Ministry of Finance, the growth rate of public debt from January to September 2024 was slower compared to the same period in 2023. Here’s an analysis of the trends in both domestic and foreign debt.

Domestic Debt: A Modest Increase

The country’s domestic debt, which consists of borrowings from local sources such as treasury bills and bonds, increased from LKR 17.7 trillion in December 2023 to LKR 18.5 trillion by September 2024. This LKR 0.8 trillion increase, though significant, is much smaller than the LKR 2 trillion jump recorded between September 2022 and September 2023.

This slower growth in domestic debt reflects a conscious effort to rein in government spending and reduce dependence on domestic borrowings, which often carry high interest rates. However, with total domestic debt reaching LKR 18.5 trillion, concerns about sustainability and inflationary pressures still linger.

Foreign Debt: Stabilizing with Careful Management

Foreign debt, measured in USD, rose modestly from USD 41.5 billion in December 2023 to USD 41.8 billion by September 2024. This marks a relatively small increase of USD 0.3 billion compared to the USD 4 billion spike recorded between September and December 2023. A key contributor to the 2023 increase was a government-guaranteed debt of USD 2.6 billion during that period.

The smaller rise in 2024 suggests that Sri Lanka has managed to stabilize its external borrowings, likely due to tighter controls on foreign loans and the restructuring of some existing debts. While this is a positive development, external debt remains a critical concern due to exchange rate volatility and global economic uncertainties.

What Does This Mean for Sri Lanka?

The slowdown in public debt growth is a promising signal, indicating a potential turning point in the country’s financial trajectory. However, it’s important to note that debt levels are still high, and meaningful reform will be required to ensure long-term fiscal sustainability. Key takeaways from these trends include:

1. Improved Fiscal Discipline: The government appears to be exercising greater control over borrowing, both domestically and internationally. This could help ease pressure on Sri Lanka’s economy in the long term.
2. Challenges in Managing Domestic Debt: While domestic borrowing is easier to access, it often comes with higher interest costs, which can strain government finances.
3. Foreign Debt Vulnerability: Even though foreign debt growth has slowed, Sri Lanka remains exposed to global market risks and foreign exchange fluctuations.

The Road Ahead

To build on this momentum, Sri Lanka must adopt policies that promote sustainable debt management. These could include:

• Strengthening revenue generation through tax reforms and improved collection systems.
• Reducing reliance on short-term borrowings that carry high interest rates.
• Promoting export-led growth to stabilize foreign exchange reserves and reduce the need for foreign loans.

Sri Lanka’s journey to economic recovery is far from over, but these signs of slowing debt growth offer a much-needed respite. It’s a critical moment to capitalize on these gains and implement structural reforms that can drive sustainable growth in the years to come.

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