ECONOMYNEXT – Foreign financing of Sri Lanka’s budget was negative up to April 2025 by 27.9 billion rupees, up from 7.4 billion last year, official data shows indicating that foreign debt was being repaid on a net basis again.
The entire budget deficit of 261.6 billion rupees (and the foreign debt repayment) was financed with domestic borrowings of 289.5 billion rupees.
Net Debt Repayment
Sri Lanka rarely has negative foreign financing of the budget, but with new bilateral lending drying up and the repayment of multilateral debt, Sri Lanka has been repaying debt on a net basis for many months of the year, since monetary stability was reached.
In 2024, foreign financing of the budget was also 3 billion dollars negative by December, but it was partly from debt restructuring.
In order to make foreign capital repayments, the central bank has to maintain monetary stability with deflationary policy at an appropriate interest rate by squeezing the current account.
Separately from the government, the central bank also has to repay its own debt, taken to drive up imports and the current account deficit during the last inflationary rate cut crisis which ended in sovereign default.
The private sector has separately repaid debt on a net basis, as the central bank avoided inflationary policy until the last quarter of 2024.
There is widespread belief in Sri Lanka that debt repayment is only starting now, though private and official debt repayment has been unusually heavy since monetary stability was reached in September 2022, triggering a current account surplus (Sri Lanka became a net creditor nation for the year).
RELATED : Sri Lanka banking system repays debt or builds fx reserves of US$7.4bn since default
With the latest rate cut and the ‘single’ policy rate, where there is a tendency to print large volumes of money to narrowly mis-target overnight rates as was practically demonstrated in the last quarter of 2024, concerns have been raised about the interest rate structure and reserve collection.
Sri Lanka has exchange and trade controls, showing that the central bank’s operating framework is fundamentally flawed.
The central bank has moved from one flawed operating framework to another, especially since 1978 with an improvement seen only from 1994 to 2010.
If interest rates are too low and especially if money is printed like in late 2024 to mis-target short term rates, the central bank will lose the ability to collect reserves, and the country can lose the ability to repay debt, whatever the improvements to the budget through tax hikes as happens in Latin America, analysts say.
In 2018, after taxes were raised, and rate cuts triggered forex shortages, debt was repaid with foreign borrowings, but Sri Lanka is now limited to budget support loans after post-war credit downgrades.
Tax Growth
In the four months to April 2025, tax revenues grew 21 percent to 1,349 billion rupees, non-tax revenues grew 6 percent to 104.2 billion rupees, and total revenues grew 20 percent to 1,453 billion rupees.
Current spending grew 13 percent to 1,603 billion rupees, with interest costs rising 9.4 percent to 794 billion.
Meanwhile, non-interest current spending grew 17 percent to 809 billion rupees. Sri Lanka has a large bloated public sector, and people have to pay high levels of tax to pay their salaries.
From April, public sector salaries and pensions were raised. After the last rate cut crisis, the currency collapsed from 184 to 300, pushing up prices and reducing the value of both public and private sector salaries.
In addition, tens of thousands of graduates educated at taxpayer expense are also targeting the taxes and taking them home after reporting for ‘work’. Since 2004, graduates have been the key beneficiaries of the tax system.
Rice farmers also get subsidies while import controls keep rice prices over 50 percent above the rest of the region, keeping food prices high for children of poor families, driving up malnutrition.
After the last rate cut/currency crisis, income tax rates were also raised to generate revenue for state spending, further hurting citizens, driving up out-migration in ‘tax-and-spend’ policies promoted by the IMF instead of engaging in spending-based consolidation.
With higher tax revenues the gap between total revenues and current spending or the current account deficit of the budget narrowed to 150 billion rupees, up to April 2025 from 203 billion rupees last year.
Capex 20 percent to 112.9 billion rupees, with bilateral projects yet to resume. There have been concerns raised that public sector officials are balking at approving tenders, which may be slowing procurement.
Despite the rise in current spending, the overall budget deficit was down to 261.6 billion rupees up to April from 361.1 billion rupees.
(Colombo/June07/2025)
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