Chayu Damsinghe
Economic Analysts of Frontier Research at a recent DebtCon7 Forum, suggest that Sri Lanka could lower its borrowing costs by issuing diverse instruments and broadening access to the government securities market.
Currently, the government does not widely issue variable rate instruments, which could provide more stability and attract a broader range of investors, they said at a recent DebtCon7 Forum. Frontier Research’s findings underscore the critical need for strategic debt management and careful consideration of interest rate trajectories to safeguard the returns of the Employees Provident Fund and manage the country’s debt profile effectively. Analysts have called on the Monetary Board to lower interest rates as realized inflation has been very low. Recent changes to electricity prices would suggest that there will be further disinflation in the period ahead.
Frontier Research also highlighted how domestic debt optimization and fluctuating interest rates could significantly impact the real returns of the Employees Provident Fund (EPF). During the crisis period, elevated interest rates were a concern, and the normalization of these rates could either yield substantial gains or diminish returns if rates revert to abnormal highs.
Frontier Research noted that varying the discount rate from 9% to 17% could drastically alter the fund’s real returns. “You can say there were either massive gains or massive losses to the superannuation fund,” said Macroeconomic Research Head Chayu Damsinghe during the forum held in the UK.
Damsinghe also expressed concern about the surge in government debt. From October 2022 to December 2023, estimated T-bills outstanding, excluding Central Bank of Sri Lanka (CBSL) holdings, increased by approximately 170%, far outpacing the 3.5% inflation rate. “We tried to push out our maturities, but our short-term debt stock increased dramatically. This reversed some of the gains made in Gross Financing Requirements,” he said.
The volatility in secondary market T-bond rates from January 2022 to July 2023 further highlights the instability. “Early 2022 saw rates spike by 1,000 basis points (bps), reaching around 20% by April, followed by another sharp rise. Rates fluctuated significantly throughout the year, reflecting the market’s sensitivity to economic conditions and policy changes. We saw massive volatility in bond rates. At this point, we have to ask ourselves at what rate do you discount Sri Lanka’s long-term debt instruments? We have no idea what must be done,” Damsinghe said.
To manage immediate financial pressures, T-bond principal payments are scheduled to decrease until 2026, offering short-term relief. From 2027 to 2032, payments will be slightly lower, but there will be a significant rise from 2033 onwards, shifting the burden to later years. (TP)
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