• High interest payments and T-bill refinancing needs strain fiscal consolidation
• Domestic financing primarily funds deficit due to limited foreign access

Sri Lanka’s fiscal financing pressures will persist in 2025 despite continued fiscal consolidation due to large Treasury bill (T-bill) refinancing needs, the World Bank said.

In its Sri Lanka Development Update report, the World Bank said the reduction in the fiscal deficit in Sri Lanka was limited by the high interest bill as interest payments were the single largest expense, amounting to 9% of GDP by end of 2024.

It said that the interest bill was higher than expected due to the state-owned bank recapitalisation, which was provided as an interest subsidy, rather than a capital expenditure as originally budgeted 1% of GDP.

“As a result, the fiscal deficit is estimated to have fallen by only 1.5 percentage points to 6.8% of GDP. With limited access to foreign financing, this was primarily funded by domestic sources,” the World Bank said.

The budget 2025 has set out a total gross borrowing requirement of Rs. 4 trillion as the government looks to service Rs. 4.55 trillion debt in 2025, where Rs. 2.95 trillion is interest payments.

According to First Capital, the government issued Rs. 854.4 billion in government securities in March out of which T-bill issuance amounted to Rs. 593.2 billion.

The year-to-date issuances amounted to Rs. 2,469 billion while the government has settled more than issued in the first quarter with Rs. 127.6 billion excess in repayments.

In the first three months of the year, three-month and six-month T-bill rates have fallen by 90 and 80 bps, longer term debt such as the 12-month T-bill has only come down by 62 bps while the two-year Treasury bond rate has increased by 25 bps.