- Debt-to-GDP ratio already below IMF projections
- Economic growth, currency appreciation can reduce debt burden
Sri Lanka is confident that it can drive the debt-to-GDP ratio well below 95% by 2032 with GDP and currency overperformance, as the debt has already fallen below the required level.
A statement from the Finance Ministry said that various critiques have been made of the International Monetary Fund’s (IMF) debt sustainability analysis (DSA) target, with the view that the debt-to-GDP target of 95% by 2032 is too high.
“However, 95% is just the target, there is nothing to prevent the government from achieving a debt to GDP well below that target,” the statement.
The Finance Ministry said that debt to GDP has already declined below the level the IMF anticipated at the time of the programme review and that any over-performance in GDP growth and currency will help the country drive the debt-to-GDP ratio below the 95% target.
Moreover, it said that the negotiations with the bondholders have ensured that even at the highest state of growth over-performance, a nominal haircut of 16% is obtained, and a net present value (NPV) haircut of 33% (at an 11% discount rate) is achieved.
Further, it said that Sri Lanka has a limit on the foreign exchange debt flow, which is the 4.5% of GDP upper ceiling on foreign currency debt service that creates an implicit limit on the stock of foreign currency debt with which Sri Lanka’s debt can remain sustainable.
“The outcome of the debt restructuring was far better than the target level, where forex debt service is limited to below 4% of GDP during the period 2027-2032,” the statement said.
The Finance Ministry said that in general, for a middle-income country like Sri Lanka, the stock of debt matters less than the cost of debt (debt flow).
For example, it said that from the far end of the spectrum, Japan (a high-income country) has a debt stock of over 260% of GDP. However, Japan’s debt is sustainable since the cost of debt is low and gross financing needs are limited.