"Public debt is very high in Sri Lanka and it’s a serious problem (for Sri Lanka). Domestic public debt is a larger component of total public debt and it carries macroeconomic risks that can hinder economic and social development," said the Economic Affairs Officer, Poverty and Development Division ESCAP, Dr. M Hussain Malik.
Speaking at the launch of the Economic and Social Survey of Asia and the Pacific 2008, Dr. Malik said that according to an IMF Debt Sensitivity Analysis, if GDB growth and primary balances continued at the averages of the last decade, public debt to GDP, which is already high, will continue to increase which could put the country in a debt trap.
Because Sri Lanka is no longer classified as a lower-income country, it no longer receives financial aid and the government has to rely on loans, sovereign bond issues and domestic debt instruments such as bonds and treasury bills to cover high fiscal deficits.
Dr. Malik said that Sri Lanka’s public debt was 93 percent of GDP and said that it continues to be high and that domestic debt is a larger proportion of total debt.
This leads to an increase in interest rates as domestic debt instruments have to carry high rates in order to attract public money.
Banks and other financial institutions in turn have to increase their rates over and above the Treasury bill rates in order to attract depositors and this in turn increases the lending rates.
Dr. Malik said that the government had spent 90 percent of its revenue for debt servicing in 2006.
"So the problem of having a high debt to GDP ratio is that it crowds out private sector investment and the government too cannot allocate adequate funds to essential services.
"The IMF study showed that should the government reduce the debt to GDP ratio by 20 percent within the next five years, the resources allocated to service debts could be used in other areas of the economy.
"Development expenditure can increase by as much as 50 percent, or expenditure on health by 152 percent, or even education expenditure can increase by as much as 114 percent," Dr. Malik said.
He said that high interest rates leads to high inflation.
"High inflation is a global phenomenon in the Asian region.But the worrying aspect is that it is driven by increasing food prices and since the poor spend most on food this trend is not good for the regions prospects."
In 2007 the annual average for inflation rose to 15.8 percent from 10 percent in 2006.
An IMF research paper released last week said that inflation increased mainly due to domestic causes such as an expansionary fiscal policy and a monetary policy that was not tight enough.
External shocks (the increases in fuel price and other imports) accounted for only 25 percent of the variation in consumer prices and about 32 percent in the variation in core inflation, the IMF said.
However, the UN ESCAP said that Sri Lanka’s GDP growth for 2008 is forecasted to be 7 percent with productivity improvements expected in the agricultural, industrial and services sector.
Dr. Malik said that while Sri Lanka’s tax rates remained high, as is with the rest of Asia, although Sri Lanka’s tax to GDP is the highest in the region at 15 percent, corruption and inefficiency of the administration was not helping the state raise the full revenue potential from taxes.
"The solution is to bring down the debt to GDP ratio, continue in the same economic growth momentum, discontinue wasteful expenditure and focus on development, health and education. The (government) knows what needs to be done but the problem is in the implementation," Dr. Malik said.
