primer on debt sustainability... sri lanka’s debt has exploded total outstanding government debt,...

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Primer On Debt

Sustainability

26 Sep 2020

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What is the problem?

2

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Sri Lanka’s debt has exploded

total outstanding government debt, LKR Bn (LHS), Growth rate %

Source: CBSL, Advocata Research

0%

5%

10%

15%

20%

25%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1H 2020

% change in debt

Total outstanding

debt

3

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79.0% 77.4%

83.3% 86.8%

34.0%

38.9%42.1%

55.6% 55.6%

68.1%

20

16

20

17

20

18

20

19

Bang

lad

esh

Phili

ppin

es

Th

aila

nd

Ma

laysia

Vie

tnam

India

Govt debt-to-GDP is at elevated levelsGovernment debt relative to revenue has gone up% of government revenue

Sri Lanka

Notes: Data point for Vietnam is an IMF estimate for year 2018Source: CBSL, IMF, Advocata Research

Government debt remains significantly higher than peers% of GDP

560% 564%

623%

686%

197% 193%

227%

291%

352% 344%

20

16

20

17

20

18

20

19

Tha

iland

Phili

ppin

es

Vie

tnam

Ma

laysia

Bang

lad

esh

India

Sri Lanka 20182018

4

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Motive to borrow

Borrowing can help governments

• Deal with negative shocks

• Undertake countercyclical fiscal policy

• Finance exceptionally large expenditures such as public infrastructure investments

Good Motives

• Tax smoothing (higher taxes are more

distortionary - convex)

• Counter cyclical policy (to stabilize the business

cycle)

• Long term investment

• Asset management and government debt as a

safe asset

• Dynamic inefficiency

Bad Motives

• Political budget cycles and rent seeking

• Intergenerational transfers

• Strategic manipulation

• Common pool

Why do governments borrow?

There are good and bad motives to borrow

Source: Sovereign debt: A guide for Economists and Practitioners, Advocata Research 5

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Motive to borrow

• A debt burden so large that entities cannot take on any additional debt to finance future projects

• As debt increases growth slows as resources are absorbed by the state tightening credit conditions

• Investors perceive lower real returns due to expectation of higher inflation and taxation holding back on

investments.

• Large inherited debt leads to lower future deficits or surpluses lowering growth and reducing room for

counter cyclical measures

Debt overhang problem

Source: CBSL, Global Debt Dataset, World Development Indicators, World Economic Outlook, Advocata Research

0

2,000

4,000

6,000

8,000

10,000

Jan-15 Aug-15 Mar-16 Oct-16 May-17 Dec-17 Jul-18 Feb-19 Sep-19 Apr-20

Credit to

private sector

Credit to

government

Credit to

SOE’s

LKR, Bn

4.60

4.20

3.90

2.63

4.40

3.75

3.40

2.59

0

1

2

3

4

5

Debt/GDP [0;30] Debt/GDP [30;60] Debt/GDP [60;90] Debt/GDP >90

Government debt and growth, low- and middle-income countries; 1960-2016

Notes: Data refer to central government debt. The sample includes 131 low- and middle-income countries.

Data refer to central government debt.

Real GDP growth, %

Average

Median

6

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Motive to borrow

• Central Government Debt – debt the government has built up over the years when expenditure has

been greater than revenue

• Subnational Government Debt – debt of subnational governments. Sri Lanka does not have any

subnational debt

• Subnational governments – consists of state governments and local/regional governments

• Public Debt – the amount of money that the government owes to outside creditors, includes central

government debt, foreign project loans received by SOBE’s and publicly guaranteed debt

• Government Guaranteed Loan – requires the government to repay any amount of outstanding loan in

the event of default

• Contingent Liabilities – obligations that arise from a particular discrete event(s) that may or may not

occur

Taxonomy of Debt

o Explicit liabilities – Specific government obligations defined by law or contract. The government is legally

mandated to settle such an obligation when it becomes due

o Implicit liabilities – represent a moral obligation or expected burden for the government not in the legal

sense but based on public expectations and political pressures

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Multilateral Bilateral FinancialMarkets

CentralBank

CommercialBanks

SavingsInstitutions

InsuranceFunds

Providentand

PensionFunds

OfficialFunds

PrivateBusiness

andIndividuals

Project Loans Non-ProjectLoans

Rupee LoansTreasury Bills TreasuryBonds

Sri LankaDevelopment

Bonds

Central BankAdvances

Other

3,231

USD 15.2 bn

LKR bn

6,402

Foreign debt 6,629

Domestic debt

3,170

24

873

4,606

560

236328

Foreign debtDomestic debt

1,469

1,131

3,801

310

2,429

594

56

2,461

325454

Instrument Ownership

LKR bn

Who owns the government’s debt - 2019?

ISB’s : International Sovereign BondsSource: Central Bank of Sri Lanka, Advocata Research

ISB’s

2,768

ISB’s

2,768

What is outstanding, and to who?

8

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Foreign debt

LKR bn USD bn% of foreign

debt

Multilateral 1,469.9 8.09 23.0%

ADB 802.0 4.42 12.5%

IDA 541.1 2.98 8.5%

Other 126.7 0.70 2.0%

Bilateral 1,131.9 6.23 17.7%

Japan 617.8 3.40 9.7%

India 153.1 0.84 2.4%

China 138.7 0.76 2.2%

Other 222.1 1.22 3.5%

Financial Markets 3,800.7 20.92 59.4%

Export-Import Bank of China 476.6 2.62 7.4%

International Sovereign Bonds 2,733.6 15.24 43.2%

Other 588.5 3.06 8.7%

Source: Central Bank of Sri Lanka, Sovereign debt: A guide for Economists and Practitioners, Advocata Research

Multilateral Creditors

• From foreign international financial institutions such as EIB or WB

• Concessional with longer repayment periods

• Non tradeable

• Senior creditors

Bilateral Creditors

• From foreign governments and their lending arms

• Can be concessional

• Often project based

• Non tradeable, and often used by low-income countries, especially

those with poorly developed on illiquid financial market

Debt Securities

• Issued by public auction, it is a promise to repay an amount at maturity

with fixed or flexible interest rate.

• Can be short, medium or long term.

• Issued in foreign debt markets (e.g. Eurobond market) and governed

under foreign law

Foreign debt

9

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Domestic debt

LKR bn USD bn% of domestic

debt

Treasury bills 897.6 13.5%

Central bank 74.7 1.1%

Commercial bank 684.7 10.3%

Insurance and finance co.’s 71.6 1.1%

Savings institutions 21.9 0.3%

Foreign investors 23.7 0.4%

Other 20.9 0.3%

Treasury bonds 4,686.5 70.7%

Commercial banks 839.5 12.7%

EPF 2,382.4 35.9%

Savings institutions 570.0 8.6%

Departmental and official funds 321.4 4.8%

Foreign investors 80.3 1.2%

Other 492.9 7.4%

Other 1,148.9 17.3%

Sri Lanka Development Bonds 560.2 3.08 8.5%

Balance 588.7 8.9%

Treasury bills

• Highly liquid instruments with a maturity of less than a year, issued

locally

• Used to meet short-term mismatches in receipts and expenditure

• Used as collateral by the central bank in its open market operations

Treasury bonds

• Highly liquid instruments with a maturity of more than a year (2-20),

issued locally

• Issued under the Registered Stock and Securities Ordinance No. 7 of

1937, to raise public debt for budgetary purposes

• Terms of annual borrowing targets are specified in the appropriation act

• Risk free with a half yearly coupon and principal paid at maturity

• Yields are determined by the market

SLDB’s

• USD denominated securities issued in the local market and governed by

local law

• Highly illiquid as they aren’t issued on an exchange, with yields based on

a bidding system

Loans

• Loans between government and local banks

Domestic debt

Source: Central Bank of Sri Lanka, Sovereign debt: A guide for Economists and Practitioners, Advocata Research 10

www.advocata.org

Debt is sustainable if the country (or its government) does NOT, in the future, need to default or renegotiate or restructure its debt or make implausibly large policy adjustments.

What is debt sustainability

Market PerceptionExternal Financing

Requirements

Change in Share

of Short-Term

Debt

Public Debt Held

by Non-Residents

Foreign Currency

Debt

The IMF’s Debt Sustainability Analysis considers the following KPI’s

Source: Sovereign debt: A guide for Economists and Practitioners, IMF, Advocata Research 11

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Primary Balance

Primary Balance (PB) is the difference between Government Revenue(R) and non-interest Government expenditure(G)

PB = R - G

Primary Balance

-18%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

19

59

19

60

19

61

19

62

19

63

19

64

19

65

19

66

19

67

19

68

19

69

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

% of GDP

Source: Central Bank of Sri Lanka, Sovereign debt: A guide for Economists and Practitioners, Advocata Research 12

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How to Assess solvency

𝑑𝑡 ≤𝑝𝑏𝑡+11+𝑟𝑡+11+𝑔𝑡+1

+𝑝𝑏𝑡+2

1+𝑟𝑡+11+𝑔𝑡+1

1+𝑟𝑡+21+𝑔𝑡+2

+𝑝𝑏𝑡+3

1+𝑟𝑡+11+𝑔𝑡+1

1+𝑟𝑡+21+𝑔𝑡+2

(1+𝑟𝑡+3)

(1+𝑔𝑡+3)

+ . . .

For the government to be solvent its debt cannot exceed the present

value of all future primary balances

Transversality Condition

Since it is not possible to forecast primary balances into the future, the IMF and

World Bank use a more probabilistic model called Debt Sustainability Analysis

There is no threshold, but it is considered at 70% debt/GDP for middle income

market access countries

Source: IMF 13

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Breakdown of change in debt

Real

Interest

rate

effect

Growth

effectExchange

rate effect

Primary

Balance ResidualChange

in Debt

(%GDP)

= - + +-

𝑑𝑡 − 𝑑𝑡−1 =𝑖𝑡𝑤 − 𝜋 1 + 𝑔𝑡1 + 𝑔𝑡 1 + 𝜋𝑡

−𝑔𝑡

(1 + 𝑔𝑡)(1 + 𝜋𝑡)+

𝛼𝜀(1 + 𝑖𝑡𝑓)

(1 + 𝑔𝑡)(1 + 𝜋𝑡)− 𝑝𝑏 + 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙

Source: IMF, Advocata Research 14

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Real interest effect

Growth effect

Primary balance effect

Exchange rate effect

Residual

Change in public debt

-15%

-10%

-5%

0%

5%

10%

15%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Debt Attribution Analysis for Sri Lanka

Source: CBSL, IMF-Word Economic Outlook Database October 2019, Advocata Research

Contribution to change in Debt to GDP ratio ,%

Debt / GDP ratio,%

65%

75%

85%

95%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

IMF adjusted GDP Series used

for calculation

15

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Snowball Effect (R-G) and Exchange Rate Effect

-5.2%

-3.9% -3.9% -3.5%

-6.8%

-8.5% -8.9%-9.5%

-9.9%

-1.0%

-5.1%

-3.3%

-8.0%

-1.9%-1.3%

0.8%

-2.0%-2.6%

0.0%

2.3%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Automatic Debt Stabilizers - Snowball effect (r-g),%

0.0%

5.3%

1.3%

0.0%

2.9%

-0.8%

1.6%

0.3%

1.1%

0.3%

-0.8%

0.7%

3.1%

0.8%

0.1%

2.8%

1.2%0.6%

6.4%

-0.2%

-2%

0%

2%

4%

6%

8%

10%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019


Exchange rate effect on change in debt,%

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Primary Balance and Residual Effect

3.6%

0.7%

3.6% 3.4%

2.4%

-2.8%

3.3%

5.1%

3.7%

1.8%

0.8% 0.8%

2.5% 2.5%

0.2%

-0.3%

1.1%1.5%

0.0%

1.9%

-4%

-2%

0%

2%

4%

6%

8%

10%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Residual effect on change in debt, % (combine effect and non flow stock increases)


3.2% 3.1%

0.9%0.4%

1.5% 1.9% 1.6% 1.5%1.9%

3.0%

1.5% 1.3%0.9% 0.8%

1.5%

2.9%

0.2%

0.0%-0.6%

0.8%

-2%

0%

2%

4%

6%

8%

10%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Primary Balance effect on change in debt, %

Primary Deficits increase debt while Primary

surpluses reduce debt.

17

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Debt Attribution Analysis - AbsoluteInterest expense and Exchange rate variation account for 80% of the Debt increase since 1999Change in Debt , LKR Bn

-500

0

500

1,000

1,500

2,000

2,500

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Exchange Rate Variation

Interest Paid

Financing the Primary Balance

Other

Change in Debt


Financing Primary Balance 1,47712.2%

Exchange rate Variation

2,52520.9%

Other932

7.7%

LKR 11.9 TnInterest Paid

7,17359.2%

Includes LKR

78 Bn Issued

to Ceylon

Petroleum

Corporation

Includes LKR

13 Bn Issued

to Sri Lankan

Airlines

Includes proceeds from

lease of Hambantota Port

18

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Trends in Gross Financing Needs

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

LKR, Bn(LHS); % GDP(RHS)

Gross Financing Needs (LKR Bn)

Gross Financing Needs (% GDP)

Source: CBSL, Advocata Research 19

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39 78 70 69 88 165 117

346 322 318 487

328 396 521 561

664 633

889

263 286

217 296 331

363 373

587 584 484

486

578

715

825 681

705

1,147

996

43 26

80 16

195

49 192

132 297

127

292

140

188

109

193

0

500

1,000

1,500

2,000

2,500

3,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Tho

usands

Foreign:Gross borrowing

Gross Financing – who funds it

LKR bn


Domestic: Bankborrowings

Domestic: Non-Bankgrossborrowing

2,075

20

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13.0

14.1 13.9

14.8

1

3

5

7

9

11

13

15

2019 1H 2020 2020 BestCase

2020WorstCase

Forecast of key debt metrics


86.8%

93.3%

99.7%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

2019 2020 BestCase

2020 WorstCase

Debt/GDP, %Debt, LKR Tn

2.1

2.5

2.8

0

1

2

3

2019 2020 BestCase

2020 WorstCase

GFR, LKR Tn

13.8%

16.8%

19.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2019 2020 BestCase

2020 WorstCase

GFR/GDP, %

1.3%

2.6%

1.4%

2.7%1.9%

3.8%

1.8%

3.6%

0.1%

0.3%

0%

2%

4%

6%

8%

10%

12%

14%

Best Case Worst Case

Residual

Exchange rateeffect

Primarybalance effect

Growth effect

Real interesteffect

Contribution to change in Debt

to GDP ratio ,%

21

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Structure of the debt

22

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As at end-2019

Total Outstanding Government Debt % of GDP

LKR 13,032 Bn 86.8%

Average interest rates

Total Debt Domestic Debt Foreign Debt

7.5% 10.8% 4.2%

Interest: LKR 901 Bn 47.7% of revenue 30.9% of expenditure

SLDB’S ISB’s

5.6% 6.6%

WAT*: 3.5 years WAT*: 9.0 years

We have a lot of debt…we pay a lot in interest... market instruments are expensive

*WAT: Weighted Average Tenor Source: DCS, CBSL, Advocata Research 23

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Domestic

0%

20%

40%

60%

80%

100%

120%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Who owns the Debt ?

CBSL

% of GDP

Non-bank

Commercial banks

Foreign

Debt to GDP


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Debt composition – note rise in ISBs

% of total outstanding government debt

Other Central bank advances SLDB’s

Treasury bonds

Treasury bills

Rupee Loans

Foreign:Non-project loans

Foreign:Project loans

Note: Non project loans include commodities and rupee denominated T-bills and T-bonds held by foreigners; SLDB: Sri Lanka Development Bonds Source: CBSL, Advocata Research

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

4,595 5,138 9,479 10,383 12,031 13,0326,083 6,889 7,487 8,599

ISB’s

Total debtLKR bn

Do

me

stic

de

bt

Fore

ign

de

bt

3,589 4,1612,583 3,0422,2222,1401,670 1,8631,4531,219

25

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Debt securities comprise a major part of the debt

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019


LKR bn,

Treasury bonds

ISB’s

SLDB’s

Treasury bills

0

5,000

10,000

15,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Securities as % of outstanding central government debt

Total Securities

Other debt

26

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Domestic debt by instrument

% of total domestic debt

Other

Central bank advances

SLDB’s

Treasury bonds

Treasury bills

Note: Non project loans include commodities and rupee denominated T-bills and T-bonds held by foreigners; SLDB: Sri Lanka Development Bonds Source: CBSL, Advocata Research

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2,570 2,809 5,433 5,664 6,071 6,6293,316 3,929 4,374 5,055

Total debtLKR bn2,140 2,4011,479 1,7151,2651,143689 1,020816677

Rupee Loans

27

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Domestic debt by ownership

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Private businesses and individuals

Official funds

Provident and pension funds

Insurance funds

Savings institutions

Commercial banks

Central Bank


Non-Market borrowings


2,570 2,809 5,433 5,664 6,071 6,6293,316 3,929 4,374 5,0552,140 2,4011,479 1,7151,2651,143689 1,020816677

28

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Foreign debt by type

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Multilateral

Bilateral

Financial market

Total foreign

debt ,

LKR mn


2,025 2,329 4,046 4,719 5,960 6,4022,767 2,960 3,113 3,5441,449 1,7601,103 1,326957996721 844637542

% of total foreign debt

29

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Foreign debt ownership

0

500

1,000

1,500

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

LKR bn

ADB

IDAIBRDIFADEIBOPEC

-

500

1,000

1,500

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Japan

India

ChinaGermany

FranceOther

Other: USA, Saudi Arabia, Kuwait, Canada, Netherlands

0

1000

2000

3000

4000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

LKR bn

LKR bn

Exim Bank of China

Other: Includes outstanding defense loans (up to 2016), Rupee denominated Treasury bonds and Treasury bil0ls held by foreign investors and foreign currency term financing facility

Other

ISB’s

ADB: Asian Development Bank, IDA: International Development Association, IBRD: International Bank for Reconstruction and Development, IFAD: International Fund for Agricultural Development, EIB: European Investment Bank

Nordic Development Fund

Asian Infrastructure Investment Bank

Mu

ltila

tera

l d

eb

t B

ila

tera

l d

eb

t F

inan

cia

l M

ark

et

deb

t


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Chinese and Japanese ownership of Outstanding Foreign Debt

1,4891,741

2,1522,425 2,463

2,776

3,186

3,777

4,8035,169

478.9

529.0

547.5

468.4416.4

457.5

486.2

506.8

613.6

617.9

56.5

59.5

67.4

67.2 234.0

310.5

374.0

435.1

543.0

615.3

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Others (80.7%)

Japan (9.7%)

China (9.6%)

2,024.6

2,329.3

2,767.32,960.4

3,113.1

3,544.0

4,045.8

4,718.6

5,959.5

6,402.4 TotalLKR bn


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Top 20 holders of Sri Lankan International Sovereign BondsInvestor Investment Value % Outstanding

BlackRock Inc 730 4.8%

HSBC Holdings PLC 257 1.7%

Neuberger Berman Group LLC 251 1.7%

JPMorgan Chase & Co 209 1.4%

UBS AG 177 1.2%

T Rowe Price Group Inc 172 1.1%

Goldman Sachs Group Inc/The 153 1.0%

Allianz SE 149 1.0%

Prudential PLC 135 0.9%

FIL Ltd 132 0.9%

Credit Suisse Group AG 115 0.8%

Royal Bank of Canada 112 0.7%

Nordea Bank Abp 105 0.7%

Capital Group Cos Inc/The 102 0.7%

Invesco Ltd 100 0.7%

Pictet Funds SA 85 0.6%

Wellington Management Group LLP

75 0.5%

Danske Bank A/S 66 0.4%

Ashmore Group PLC 63 0.4%

Candriam Investors Group 61 0.4%

Others 11,801 78.4%

Source: Bloomberg LP, Advocata Research 32

www.advocata.org

ISB Holdings are not constant – rebalancing and flows

2019 Q3 2019 Q4 2020 Q1 2020 Q2 Curr Position

BlackRock Inc 95,778 92,841 79,180 85,006 85,780

FIL Ltd 10,727 28,178 28,290 31,602 31,487

HSBC Holdings PLC 58,679 26,242 23,242 20,629 30,126

Neuberger Berman Group LLC 24,986 25,486 27,486 27,266 27,266

Allianz SE 24,950 24,450 35,850 26,850 26,850

JP Morgan Chase & Co 20,044 23,076 26,154 22,901 22,901

Ashmore Group PLC 18,736 19,818 19,388 19,549 19,549

Candriam Investors Group 15,900 15,900 15,900 15,900

Pictet Funds SA 18,107 15,083 15,283 15,283 13,799

UBS AG 25,496 24,195 18,351 19,426 13,436

Prudential PLC 10,300 9,700 10,700 13,200 13,200

Sun Life Financial Inc 3,254 1,662 1,662 12,563 13,163

Credit Suisse Group AG 5,360 5,850 11,750 7,000 12,100

Standard Life Aberdeen PLC 22,390 19,350 19,060 19,060 11,880

Nordea Bank Abp 14,895 16,595 17,295 16,920 8,170

Danske Bank A/S 6,697 6,387 6,504 6,158 6,460

Morgan Stanley 490 - - 6,040 6,040

Banque Lombard Odier & Cie SA 2,000 5,000 - - 5,500

Intesa Sanpaolo SpA 2,800 8,598 4,148 5,148 5,148

Legal & General Group PLC 4,700 4,700 4,700 4,700 4,700

Invesco Ltd 32,060 33,150 32,890 4,641 4,641

Source: Bloomberg LP, Advocata Research 33

www.advocata.org

Composition of Floating Rate Debt

16.3%14.8%

17.1%15.8%

35.3%

31.6%

34.5%

29.0%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2015 2016 2017 2018

% of

Floating

rate Debt

to Foreign

Debt

% of

Floating

rate Debt

to Total

Debt


Floating rate Debt, %

0%

1%

2%

3%

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20

6 Month LIBOR , %

34

www.advocata.org

Foreign Debt- Currency Composition

2,2072,650

3,7824,278

756

830

955

927

497

516

623

625

184

208

226

229

402

514

374

344

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2016 2017 2018 2019

67%

Currency Composition of Foreign Debt, LKR Bn


US Dollar

SDR

Yen

Euro

Other

35

www.advocata.org

Off balance sheet debt

50 50 110 167 212 291

379 327 440

382

523 590

782 778

% GDP (RHS)

0%

1%

2%

3%

4%

5%

6%

-

200

400

600

800

1,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Public Guaranteed Debt, Bn

Publicly Guaranteed Debt increases to 5.2% of GDP in 2019Public Guaranteed Debt , LKR Bn (LHS), % GDP (RHS)

Most Guarantees are given to CPC and RDA borrowingsPublic Guaranteed Debt , LKR Bn

0

200

400

600

800

1,000

2016 2017 2018 2019

CPC

RDA

SLACEBOther

Water Board DefenceUniversity

Source: CBSL, Ministry of Finance, Advocata Research 36

www.advocata.org

Debt Servicing

37

www.advocata.org

Government debt and its costs are on the rise

Interest cost on debt, LKR bn


Domestic

Foreign

7 7 9 9 10 11 12 14 7 17 21 30 36 55 69 91 101 108 115 127165

213249

49 48 53 6285 106 114 106 113

134161

182

274

297 288

318343 328

394

484

571

639

653

0

100

200

300

400

500

600

700

800

900

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

735

852

901

610

509

436444408

357353

310

212183

151120120

6271 94

117 125

5556

38

www.advocata.org

Average cost of debt

7.2% 6.7% 6.8%7.7% 8.0% 7.5%

6.4%5.6%

6.8% 7.1% 7.0%8.6% 8.5% 7.8% 8.0% 7.3%

6.3% 6.8% 7.1% 7.8% 8.2% 7.5%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019


Total debt Interest, %

1.9% 1.9% 1.8% 1.8% 1.7% 1.6% 1.6%0.7%

1.8% 1.9% 2.3% 2.5%3.2% 3.4%

3.9% 3.6% 3.7% 3.7% 3.6%4.1%

4.5% 4.2%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

12.3% 11.5% 11.4% 12.5% 13.0% 12.0%10.3% 9.9% 10.5% 10.9% 10.6%

12.8% 12.4% 11.2% 11.3% 10.3%8.3% 9.0% 9.6% 10.5% 11.3% 10.8%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Foreign debt Interest, %

Domestic debt Interest, %

39

www.advocata.org

Government debt and its costs are on the rise

5.9%

6.0%

7.4%6.9%

5.7%

4.9% 5.1% 5.1%4.8%

6.4%

5.5%4.9%

4.7% 4.6%4.2%

4.7%5.1%

5.5%5.9% 6.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Interest to average debt

%


Interest to GDP

40

www.advocata.org

Interest and Amortization as percentage of revenues% of total revenue


0%

20%

40%

60%

80%

100%

120%

140%

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

Interest

Amortisation

Debt service

0%

20%

40%

60%

80%

100%

120%

140%

160%

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

Am

ort

izat

ion

pay

men

t

Foreign

Domestic

Inte

rest

pay

men

t

Foreign

Domestic

% of total revenue

41

www.advocata.org

Debt Management

42

www.advocata.org

Market structure and infrastructure

Source: Central Bank of Sri Lanka, Advocata Research

Laws governing Sri Lanka’s debt

• Appropriation Act (annually by the parliament) – sets the borrowing

limit

• Fiscal Management (Responsibility) Act (No. 3 of 2003)

• Foreign Loans Act No.29 of 1957

• Monetary Law Act No.58 of 1949

• Registered stock and securities Ordinance No. 7 of 1937 (as

amended)

• Local Treasury Bills Ordinance No.8 1923 (as amended)

Fragmented Institutions governing Sri Lanka’s debt

• Treasury

o Department of external resources

o Department of national budget

o Department of treasury operations

• Public Debt Department – CBSL

What we have

• A centralized public debt office under the treasury

• No electronic market for GSEC trading – weak price discovery and transparency

• Lack of large-scale retail participations (approximately 40,000 active CDS accounts)

• No Central Counter Party (CCP)

• SLDBs need to be dematerialized and made fungible by issuing based on price NOT yield

What we need

43

www.advocata.org

Maturity of Domestic Debt pushed back while maturity of Foreign debt has been brought forward

0

2

4

6

8

10

12

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Average Time to Maturity, years

Note: ATMs of Foreign currency debt are in house estimates Source: CBSL, Advocata Research

Domestic Debt

Total Debt

Foreign Debt

44

www.advocata.org

Domestic debt management

45

www.advocata.org

4%

6%

8%

10%

12%

14%

12-Jan-16 12-Jul-16 12-Jan-17 12-Jul-17 12-Jan-18 12-Jul-18 12-Jan-19 12-Jul-19 12-Jan-20 12-Jul-20

Term spread for G-sec

0%

1%

2%

3%

4%

12-Jan-16 12-Jul-16 12-Jan-17 12-Jul-17 12-Jan-18 12-Jul-18 12-Jan-19 12-Jul-19 12-Jan-20 12-Jul-20

10Y-1Y (LHS)

5Y-1Y (LHS)

Spread,%


10Y (RHS)

5Y (RHS)1Y (RHS)

Yield, %

46

www.advocata.org

Inflation Effect and Financial Repression Effect

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Jan-04 Oct-04 Jul-05 Apr-06 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14 Apr-15 Jan-16 Oct-16 Jul-17 Apr-18 Jan-19 Oct-19 Jul-20

%


Policy Rate - Inflation

1Y G sec – Policy

Rate

47

www.advocata.org

-4,000

-2,000

0

2,000

4,000

6,000

8,000

2015 2016 2017 2018

Weighted Average Yield Rates for G-Sec

0%

2%

4%

6%

8%

10%

12%

14%

2011 2012 2013 2014 2015 2016 2017 2018

Yield, %

Primary Market T-Bills

yield (RHS)

Primary Market T-Bonds yield

(RHS)

* T bills volume issued show net issuance for the year Source: CBSL, Advocata Research

New Issuances

Outstanding Bonds and Bills

at the beginning of the year

Repayments

Volume Issues, LKR Bn

48

www.advocata.org

External debt management

49

www.advocata.org

ISB’s were issued at high coupon rates

Amount Issued, USD Mn

Source: Bloomberg LP, Advocata Research

0

500

1,000

1,500

2,000

2,500

3,000

Oct-07 2008 Oct-09 Apr-10 Jul-11 Jul-12 2013 Jan-14 Apr-14 Jun-15 Nov-15 Jul-16 May-17 Apr-18 Mar-19 Jun-19

10.8Y 10Y 5.5Y 5.3Y 5Y

8.25%7.4%

6.25% 6.25% 5.875%6.00%

5.125% 6.125%

6.85%

6.825

%

5.75%

6.2%5.75%

6.75%

7.85%

6.85%

6.35%

7.55%

Coupon

Rate

Benchmark

Spread

326

bps447

bps453

bps355

bps

376

bps

464

bps

543

bps

381

bps

387

bps

302

bps

522

bps

442

bps458

bps

377

bps426

bps

50

www.advocata.org

Domestic debt is a larger proportion of government debt service obligation

421

1,171

553 630 497 411

108

517

467 409 347

299 $1.1

$2.4

$2.2 $1.7

$1.7$2.2

$0.3

$1.1

$0.9$0.8

$0.7 $0.6

-

400

800

1,200

1,600

2,000

2,400

2,800

2020 2021 2022 2023 2024 2025

Note: *as at 24th September 2020; Source: Bloomberg, CBSL, Advocata Research

Debt maturity profile

Yearly principal and Interest for total traded debt, LKR bn, USD bn

Foreign debt maturity profile is fairly spaced out…Foreign debt service,USD mn

1,000 1,000 1,500 1,250 1,500

2,150 38

1,325690

395

20

1,180

1,7062,357

2,579 2,8742,221

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2020 2021 2022 2023 2024 2025

Total in:

LKR Bn

USD Bn

2,300

$12.4

781

$4.2

1,553

$8.4 1,495

$8.1 1,287

$6.91,231

$6.6

2,290

4,031

4,5474,224

4,374 4,390

Foreign Interest

Foreign Principal

Domestic Interest

Domestic Principal

Estimate of

interest and

loan servicing

SLDB

ISB

Total

51

www.advocata.org

Current Market Conditions

52

www.advocata.org

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

B+

BB-

B


B2

B1Moody’s

Fitch

S&P

Negative fiscal conditions constrain an otherwise positive outlook

B-

Country rating has been deteriorating…

2018 Political coup



BB+

B-

Upgrade

• Improved external finances

• Improved policy coherence and credibility leading to more sustainable public and external finances and a reduction in risk of debt distress

• Stronger public finances supported by a credible medium-term fiscal

consolidation strategy

Downgrade

• Further increase in external funding stress that threatens ability to meet external debt repayments

• Prolonged policy uncertainty

• Failure to limit increase in general government debt to GDP

• If multilateral and bilateral support is not forthcoming

53

www.advocata.org

S&P Sovereign Foreign Currency Rating Pathways (1975-2019)

1 Year Transition Rates 3 Year Transition Rates

B

BB

BBB

A

BB

B

CCC/CC

B

SD

Source: S&P Global: 2019 Annual Sovereign Default And Rating Transition Study, Advocata Research

B

BB

BBB

A

BB

B

CCC/CC

B

SD

Sri Lanka’s Current Rating - B

54

www.advocata.org

Net foreign Liabilities % GDP…Private Sector is also sizeable

35.9%33.2% 32.1% 33.4% 34.7%

36.8%

44.0%46.5%

18.8%21.0%

21.3%

24.0% 21.6%20.1%

18.1%16.6%

0%

10%

20%

30%

40%

50%

60%

70%

2012 2013 2014 2015 2016 2017 2018 2019


Net Foreign Liabilities % GDP

Public

Private

55

www.advocata.org

Sri Lanka ISB trends….Short term market access is not possible


2020 ISB 2021 ISB 2025 ISB 2030 ISB

56

www.advocata.org

3 4 10

17

2

67

122

57

172

5 4 5 8

16

65 70

54

157

PABC UBC NTB Seylan NDB DFCC SAMP HNB ComB BOC

16 11

2

51

93

28

9

18

70

137

36

1

Seylan PABC NDB DFCC HNB ComB BOC Sampath

31 D

ec 2

019

30 J

un

2020

31 D

ec 2

019

30 J

un

2020

N/AN/A N/A

Major banks investment in ISB’s and SLDB’s

Investment in SLDB’sInvestment in ISB’s

LKR Bn

Income earned by way of interest on any sovereign bond denominated in foreign currency

including SLDB’s are exempt from Income taxes effective 01 April 2018

Total

31 Dec 2019 30 Jun 2020

LKR ‘ Bn 200.7 270.7

USD ‘ Bn 1.1 1.5

Total

31 Dec 2019 30 Jun 2020

LKR ‘ Bn 454.0 384.1

USD ‘ Bn 2.4 2.1

LKR Bn

*As at 30th June 2020 *N/A- breakdown Not Available as at 30th Jun 2020Source: Advocata Research

N/A N/A

57

www.advocata.org

Risk from Financial Contagion


Non Investment grade bonds maturing before December 2021S&P Issuer Rating

Sri Lanka

Albania

Venezuela

Honduras

Barbados

Montenegro

Mongolia

Lebanon

Georgia

Dominican Republic

Senegal

Sri Lanka

Ukrain

0

1

2

3

4

5

6

7

8

Sep-20 Oct-20 Dec-20 Jan-21 Mar-21 May-21 Jun-21 Aug-21 Oct-21 Nov-21

CCC-

CC

B-

B

B+

BB-

BB

BB+

58

www.advocata.org

Stress Indicators

Reserves to short term External Debt,%

0%

20%

40%

60%

80%

100%

120%

140%

Mar-14 Apr-15 May-16 Jun-17 Jul-18 Aug-19

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

2Q-14 1Q-15 4Q-15 3Q-16 2Q-17 1Q-18 4Q-18 3Q-19

Months of imports, End period value

0%

20%

40%

60%

80%

100%

120%

140%

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Current Account

Exports

Current account receipts and exports to foreign debt, %

20.0% 24.4% 20.2%

87.8%

217.9% 221.1%

577.5%

104.0%

Sri Lanka 2018

% of reserves to public and publicly guaranteed external debt

7,102

-

1

2

3

4

5

6

7

8

9

10

11

Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20

Tho

usa

nd

s

USD Bn


www.advocata.org

Current account and impact on currency

Source: CBSL,, Advocata Research

Goods Imports, USD Mn

0

500

1,000

1,500

2,000

2,500

Jan-18 Jun-18 Nov-18 Apr-19 Sep-19 Feb-20 Jul-20

0

200

400

600

800

1,000

1,200


Goods Exports, USD Mn

0

100

200

300

400

500

600

700

800


Remittances, USD Mn

0

100

200

300

400

500

Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20

Tourism Earnings, USD Mn

-2,000

-1,500

-1,000

-500

0

500

1Q-12 4Q-12 3Q-13 2Q-14 1Q-15 4Q-15 3Q-16 2Q-17 1Q-18 4Q-18 3Q-19

Current Account Balance, USD Mn

Total Travel

and education

spending by

locals for 2018

and 2019 was

USD 3.3Bn

60

www.advocata.org

We need to borrow each year to bridge the current account deficit –FDI gap

-6

-4

-2

0

2

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

FDI

Current

Account

Balance


Funding

deficit

% of GDP

-10%

-5%

0%

5%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019LKR Bn

-10%

-5%

0%

5%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Government

dis-saving

Current

account

deficit

-10%

-8%

-6%

-4%

-2%

0%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Current

account

deficit

61

www.advocata.org

Currency is being managed in a narrow band

Exchange rate, USD/LKR


NEER

REER

40

60

80

100

120

140

160

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

REER/NEER Index, 2017=100

160

170

180

190

200

Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20

1Y Forward rate

Spot rate

897

-174-98

62 60163

-600

-100

400


CBSL Net Absorptions (USD Mn)

62

www.advocata.org

6M2Y

5Y

3

4

5

6

7

8

9

10

11

12

13


1Y

10Y

Subsequently G-sec yields fell across the boardG-sec yields, %


Policy rates and SRR were cut, and G-Sec yields fellCBSL cut policy rates by 250bps and SRR by 300 bps in 2020, Policy rates, %

-200

-150

-100

-50

0

50

100

150

200

250

300

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20

0

2

4

6

8

10

12

Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20

1Y G-sec

Real 1Y G-sec

Government Securities rates, %

1

2

3

4

5

6

7

8

9

10

Jun-18 Dec-18 Jun-19 Dec-19 Jun-20

SRR

SDFR

SLFR

63

www.advocata.org

0.2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

50

100

150

200

250

300

350

400

May-18 Aug-18 Nov-18 Feb-19 May-19 Aug-19 Nov-19 Feb-20 May-20 Aug-20

As a % of Total G-secs (RHS) 13.5

Tbills and Tbonds held by foreigners(LHS)

Foreign borrowing limit(RHS)

Foreigners have left the domestic debt market…trying to get them back through zero cost swapsLKR, Bn(LHS); % of total government securities (RHS)

As at 19th September 2020Source: CBSL, Advocata Research 64

www.advocata.org

Current Deficit Financing mainly through GSECs…t-bill share increased

898Tbills1,142

1,211

4,687

Tbonds5,090

5,258

7,447

Other7,820

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Dec-19 Jun-20 26th September

6.8% 8.1%

35.9%

55.6%57.1%

13,031

14,052


LKR Bn

65

36.2%5,584 6,2316,469

Outstanding Government Debt

www.advocata.org

Reducing debt short of default

66

www.advocata.org

• Denotes budgetary measures taken by the government to improve its fiscal position and reduce debt to GDP

• Four Leavers – Size of adjustment, pace and duration, feasibility and durability

Fiscal Consolidation


% of GDP

-6%

-4%

-2%

0%

2%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Revenues

Primary Expenditure

Capital Expenditure

Primary Balance

67

0%

5%

10%

15%

20%

25%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

www.advocata.org

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

How it works:

❖ Growth boosts GDP in the Debt/GDP ratio

❖ Primary balance improves through higher tax revenues from higher growth and lower spending on

unemployment benefits

Growing out of debt


Contribution to Change in debt ,%

𝑖𝑡𝑤 − 𝜋 1 + 𝑔𝑡1 + 𝑔𝑡 1 + 𝜋𝑡

−𝑔𝑡

(1 + 𝑔𝑡)(1 + 𝜋𝑡)

(R – G)

68

www.advocata.org

0

200

400

600

800

1,000

1,200

Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20

How it works:

By printing money and reducing the burden on pre-existing liabilities

Monetary Policy


Seignorage: profits made by central bank from holding

interest bearing assets funded through money printingInflating the debt away

Reserve Money

305.2

0

50

100

150

200

250

300

350

400

450

Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20

CBSL net holdings of Gov.Securities (face value),

Amendments to the monetary law act

1. Objectives of CBSL

2. Functions of CBSL

3. Governance and Organization

4. Coordination Council

5. Monetary policy framework

6. Reporting and Publication

7. Supervision and resolution of financial institutions

8. Macroprudential Authority

9. Relationship with parliament government and public

10. Financial provisions

11. Internal and external audit

69

www.advocata.org

Financial Repression & Inflation Effect

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Jan-04 Oct-04 Jul-05 Apr-06 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14 Apr-15 Jan-16 Oct-16 Jul-17 Apr-18 Jan-19 Oct-19 Jul-20

%


Policy Rate - Inflation

1Y G sec – Policy

Rate

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Financial Repression - Captive sources for domestic debt

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Private businesses and individuals

Official funds

Provident and pension funds

Insurance funds

Savings institutions

Commercial banks

Central Bank


Non-Market borrowings


2,570 2,809 5,433 5,664 6,071 6,6293,316 3,929 4,374 5,0552,140 2,4011,479 1,7151,2651,143689 1,020816677

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Capital transfers pre-restrictions

• A company listed in the Colombo Stock Exchange (CSE), buying shares or

foreign sovereign bonds up to a value of USD 2,000,000 in any one year.

• A company not listed in the CSE and are buying shares or foreign sovereign

bonds up to a value of USD 500,000 in any one year.

• An individual or a partnership buying shares or foreign sovereign bonds up to a

value of USD 200,000 & USD 300,000 respectively for lifetime.

• A Company setting up overseas offices up to USD 300,000 per calendar year.

• Permitted outward remittances through Outward Investment Accounts (OIA).

270.0%

148.7%

243.8%

280.0%

251.2%

178.9%

135.8%

405.4%

254.1%

135.2%

BOC PB COMB HNB SAMP SEYB NDB NTB DFCC PABC

Source: Interim/ Annual Reports, Advocata Research

Financial Repression and Capital Controls

* Liquid Assets (Banking Act No. 30 of 1988) Every licensed commercial bank shall

maintain liquid assets in such amount determined by the Monetary Board not be

less than 20% and not more than 40% of the total of its liabilities, less its liabilities

to the Central Bank and to the shareholders.

90%

Liquidity Coverage Ratio

• The above transfers were restricted in April 2020. Further transfers

through PFCA and BFCA accounts have been restricted up to USD

20,000.

The following were relaxed effective July 2020 for a period of 6

months

• Investments financed through FCY borrowings from out of the country

• Additional capital infusion for working capital purposes up to USD

20,000 to an established subsidiary

• Limitation on repatriation of funds under the migration allowance up to

USD 30,000 for the first time and USD 20,000 for emigrants who have

already claimed the allowance

As at 30 June 2020

Policies that create a captive audience for government debt, allowing governments to issue debt at a rate

below what the market would charge had there been no restrictions

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Contractual Savings Institutions are captive sources

0

20

40

60

80

100

120

140

160

180

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

LKR Bn


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

% of Total Portfolio

Government Securities

Other

Contributions

Refunds

Employees’ Provident Fund Employees’ Trust Fund

-

5.0

10.0

15.0

20.0

25.0

30.0

2010 2011 2012 2013 2014 2015 2016 2017 2018

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013 2014 2015 2016 2017 2018

Government Securities

Other

Contributions

Refunds

LKR Bn

% of Total Portfolio

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Contributions to public debt reduction in non-default episodes

-100

-80

-60

-40

-20

0

20

1880-1914 1914-1945 1945-1970 since 1970 High inflation Moderate inflation

Contribution of stock-flow adjustment Contribution of interest growth differential

Contribution of primary surplusses Total debt redcution

Advanced Economies Emerging Markets (since 1980) Low Income Countries (since 2000)

Source: ‘Sovereign Debt: A Guide for Economists and Practitioners’, Abbas et al. (2010,2011); IMF (2018a) and sources therein, Advocata Research

Change in public debt as a % of GDP

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IMF

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Typical IMF programs for middle income countries

Purpose Facility Financing Duration Conditionality

Present, Prospective or

potential BoP need

SBA GRA Up to 3 years, but

usually 12-18 months

Ex-post

Protracted BoP need.

Medium-term assistance

EFF GRA Up to 4 years Ex post with focus on

structural reforms

Actual and urgent BoP

need

RFI GRA Outright purchase No Fund supported

program/ ex-post

conditionality, but prior

actions possible

IMF lending aims to give countries breathing room to implement adjustment policies in an orderly manner,

which will restore conditions for a stable economy and sustainable growth. It has a catalytic effect that

improves market access.

Source: IMF, Advocata Research76

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IMF COVID-19 Financial Assistance and Debt Service Relief

Country Type of Emergency Financing Amount approved (USD Mn) Date of Approval

Bangladesh

Rapid Credit Facility 244.0

29 May 2020Rapid Financing Instrument 488.0

Maldives Rapid Credit Facility 28.9 22 April 2020

Mongolia Rapid Financing Instrument 99.0 3 June 2020

Myanmar

Rapid Financing Instrument 237.7

26 June 2020Rapid Credit Facility 118.8

Nepal Rapid Credit Facility 214.0 6 May 2020

Papua New Guinea Rapid Credit Facility 363.6 9 June 2020

Samoa Rapid Credit Facility 22.0 24 April 2020

Solomon Island

Rapid Credit Facility 9.5

1 June 2020Rapid Financing Instrument 19.0

Afghanistan Rapid Credit Facility 220.0 29 April 2020

Pakistan Rapid Financing Instrument 1,386.0 16 April 2020

Somalia Extended Credit Facility and the Extended Fund Facility 395.5 25 March 2020

Jordan

Rapid Financing Instrument 396.0 20 May 2020

Extended Fund Facility 1,300.0 26 March 2020

*As at 25th September 2020Source: IMF, Advocata Research

Regional peers that have received IMF funding since March 2020

102 countries have requested IMF COVID-19 Financial Assistance and Debt Service Relief

Financing for 72 countries has been approved by the IMF’s Executive Board

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IMF - Assessment of Debt Sustainability, Market Access, and

Fund Lending

Member has

market accessNormal Fund lending Normal Fund lending Unlikely

Member has lost

market accessNormal Fund lending Reprofile Upfront debt reduction

Debt sustainable with high

probability (i.e. market access

loss is temporary)

UncertainDebt unsustainable with

high probability

Assessment of Debt Sustainability, Market Access, and Fund Lending

Low DSA Debt Burden Indicators HighSri Lanka IMF Quota – USD 800

Normal Access - Annual Limit –

145%, Total Limit – 435%

Exceptional Access – 500%

Source: IMF, Advocata Research78

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Extended Fund Facility

Stand-by Facility

It is currently in its 16th IMF programWidth of the line denotes length of the arrangement in years


Extended Credit Facility

Structural Adjustment Facility

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Thank you

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primer on debt sustainability... sri lanka’s debt has exploded total outstanding government debt,...

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