StanChart Forecasts Lower Interest Costs for Govt in 2021
By Saliya Ketepearchchi
Standard Chartered Bank remains sanguine that the interest cost of the Sri Lankan Government’s borrowings will decline in 2021, quite substantially, both as a share of the GDP as well as a share of total State revenues, as fresh borrowings are happening at all time low interest rates.
Although the Government’s debt stock is expected to expand, fresh borrowings are coming at lower interest rates, particularly in the domestic market while the foreign borrowings are getting relatively cheaper as the dollar yields are hovering near zero levels in the international capital markets.
The research Firm forecasted the interest cost of the Government to fall to around 5.8 per cent of the Gross Domestic Product in 2021, from 6.3 per cent of the GDP in 2020.
When looked at from the Government’s revenue standpoint, the bank puts the interest cost at 55 per cent of total State revenue for 2021, sharply lower from 70 per cent expected to have reached in 2020, the bank’s recent Credit Alert said.
StanChart however believes this is still on the high side for a country seeking higher growth. In any case, the public debt reduction is a medium to long-term function and cannot be done in a year or two, especially when no economy in the world is spared from the pandemic induced shocks, economic analysts say.
The bank puts the total public debt at an estimated 105 of GDP for 2020, rising to110.5 percent in 2021. However the Government says these are gross overestimates as they plan to reduce the debt stock in the medium term, while trimming the reliance on foreign borrowings.
ICRA Lanka, a rating agency this week gave a less dour outlook for public debt as it estimated that the debt-to-GDP to have reached 97.4 per cent GDP in 2020 and would end up at 99.3 per cent of GDP by the end of 2021, albeit the total debt stock increasing to Rs.16.3 trillion from Rs.14.6 trillion in 2020.
This is while ICRA Lanka expecting the economy to grow by only 3.6 per cent in 2021, slower than 4.5 per cent projected by StanChart and much lower than the five to six per cent growth expected by the Central Bank.
Higher the economic growth, the debt stock seem low and vice versa.
“ The Government’s fiscal policy is now closely aligned with Modern Monetary Theory. This means we can expect the Treasury to rely less on the market borrowings while leaning more towards financing spending via short-term direct borrowings from the Central Bank. In the meanwhile, impaired access to foreign markets may bring down the foreign currency denominated debt”, ICRA Lanka added.
The Sri Lankan Government has been on a borrowing binge since the onset of the pandemic in March last year by selling Treasury bills and bonds to the Central Bank - a mechanism known as Central Bank liquidity - as the foreign borrowings ran dry due to the market tumult caused by the pandemic related disruptions to the financial flows.
The Central Bank liquidity which is also known as printed money was necessary to support the economy beset by the pandemic to provide the much needed stimulus to the people who lost their livelihoods due to the pandemic as well as to run the essential services when the State revenues came under pressure due to economic shutdowns triggered by the pandemic.