Sri Lanka needs to bring down its debt-to-GDP ratio even below the International Monetary Fund target (IMF) of 95% to face bad shocks to the economy in the future, former acting Chief Economist at World Bank, Prof. Shanta Devarajan said.

Speaking in a webinar organised by the Youth Liberal Movement on Monday (3), Devarajan who advises the Sri Lankan Government on debt restructuring said that even after a successful debt restructuring, the government debt will be brought down to 95% of the GDP, which is still high for a country like Sri Lanka.

He said that to avoid bad shocks such as another war in the Middle East, which could create economic difficulties for Sri Lanka, “We have to bring down that debt to GDP ratio even further which means getting the growth rate up,” he added.

Devarajan said that Sri Lanka needs to get the growth rate or the denominator higher to bring the Government's overall debt down.

According to the IMF’s Debt Sustainability Analysis(DSA), The debt to GDP ratio of Sri Lanka should be reduced to 95% by 2032 from 128% of GDP in 2022, while the country has to bring down the gross financing needs to an average of 13.5% of GDP during 2027-2032.

Sri Lanka has to limit the Foreign debt service to 4.5% of GDP between 2027-2032.

Further, Devarajan said that borrowing from capital markets increased the accountability of the government as when the government is reckless such as running big fiscal deficits, the private sector will punish you instantly by lowering your credit rating or increasing the interest rates on the bonds. 

“This is a tool of fiscal discipline brought on by the external creditors who have no real interest in the politics of Sri Lanka, they just want to make money,” he added. 

However, with official creditors, he said the countries have different interests in Sri Lanka while the interest of the Sri Lankan Government also changes such as the turning down of $ 1.5 billion loan from Japan at 0.01% interest to build the light railway system in Colombo.