Financial Times

Avoiding sharp rupee depreciation to help manage public debt in 2009

By Dilshani Samaraweera

Public debt is expected to increase in 2009 and the government is expected to seek out more ‘non-traditional’ sources of funding, but the debt increase can be maintained at a manageable level by keeping rupee depreciation costs below Rs 100 billion, said the Central Bank on Friday.

“We want to keep the public debt at 81% of national GDP in 2009. But because the GDP growth was revised to about 2.5% for 2009 we are expecting an increase in the debt,” the Superintendent of the Public Debt Department C. J. P. Siriwardena, told The Sunday FT after the launch of the Central Bank’s 2008 Public Debt Management report on Friday.

In 2008 total public debt as a percentage of GDP was 81.1%. The debt to GDP ratio has been declining from about 106% in 2004. The Central Bank noted that avoiding a sharp rupee depreciation is important to keep the public debt at a manageable level.

“If the cost of rupee depreciation can be kept below Rs 100 billion we can continue to maintain a declining debt to GDP ratio. If not, the debt to DGP ratio will increase. In 2008 rupee depreciation alone added Rs 131 billion to the debt. This is a 4.3% increase in debt stock. This is mainly because the rupee depreciated by about 4% against the US dollar and by about 29% against the Japanese Yen,” said Mr Siriwardena.

Meanwhile the government is expected to look for more non-traditional sources of credit this year. Accessing credit from traditional sources will become more difficult due to the global downturn. In fact, countries that traditionally gave aid and credit to Sri Lanka are expected see large increases in their own debts. By end of 2009, Japan’s debt is expected to balloon to 219% of GDP. The US debt will hit 95% of GDP and Germany’s and Italy will have debts of 79% of GDP and 110 of GDP.

“These countries will be needing funds for their own domestic needs and funds for others will be limited,” said Mr Siriwardena. So to bridge its financing gaps the government is looking to non-traditional sources. For instance Libya is expected to provide a loan of US$ 500 million. Other sources include the diaspora bonds and market sources. “If the markets are favourable we can go to the international market and borrow, but if not we will have to have some other arrangements like syndicated loans,” said Mr Siriwardena. Treasury bonds are expected to be the main source of domestic rupee funding in 2009. The total net borrowing requirement of the Budget 2009 is Rs 306 billion. Out of this Rs 183 billion is to come from domestic sources and the balance Rs 123 billion from external sources.

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