• Net domestic financing projects at 5.8% of GDP

Government’s domestic financing needs risk remain high in 2024 as it will continue to rely on market borrowing and from superannuation funds, International Monetary Fund (IMF) said.

Accordingly, the IMF said that the Government's domestic financing needs and associated risks remain high in 2024 as net domestic financing is projected at 5.8% of GDP in 2024 due to a large fiscal deficit and limited external financing.

A key risk is the ability to access continued domestic financing at reasonable interest rates. Most gross domestic issuances in 2024 (mostly T-bills and shorter end T-bonds) are expected to be absorbed by banks and pension funds, within their respective absorptive capacity following the Domestic Debt Optimisation (DDO).

With monetary financing prohibited, IMF said that the Government will continue to rely on domestic borrowing from banks and superannuation funds—the main institutional investors in Sri Lanka

“With limited prospects of larger borrowing from superannuation funds, banks will invest more in government securities in 2024, potentially crowding out private credit,” IMF said in their staff report released after the completion of the second review.

However, it said that the growing bank balance sheets and a recovering economy is expected to mitigate these risks. 

IMG Staff recommends that Sri Lankan authorities reduce borrowing needs from the market by partially using their cash buffer accumulated in 2023 to finance the deficit. 

Between 2025 and 2029, domestic financing is expected to decline to below 3% of  GDP on the back of falling interest rates and deficits. 

long-term bonds, the banking system will have to absorb a larger share of domestic financing than assumed, and in the form of short-term debt, crowding out private credit and sapping economic growth. 

“This may lead to a reversal in the reductions of the sovereign risk premium,” IMF added.