The Ministry of Finance has provided a detailed explanation on the necessity of borrowing to manage Sri Lanka’s budgetary challenges, in light of the high annual budget deficits that the country faces. Finance Secretary K.M. Mahinda Siriwardena emphasized that the government has no alternative but to seek loans from the local market, as printing new money to cover the deficit is not a viable solution due to its inflationary risks. He addressed criticisms regarding increased borrowing under the administration of President Anura Kumara Dissanayake, clarifying the broader context and historical factors influencing the country’s fiscal situation.
Siriwardena noted that between 2020 and 2022, Sri Lanka experienced a significant increase in government debt, primarily due to deficit financing by the central bank—commonly referred to as “money printing.” This practice of creating new money to cover budget shortfalls led to unprecedented inflation, which peaked at approximately 70% in 2022. The dramatic rise in prices highlighted the risks of relying on monetary expansion to address fiscal deficits.
Since 2023, the government has shifted its strategy to cease borrowing directly from the central bank, instead opting to finance the budget deficit entirely through domestic market borrowing. While this approach helped curb inflation, it also led to higher interest rates as the demand for borrowing increased. The heightened interest rates pushed the government’s interest payment obligations to around 80% of its total revenue, adding to the fiscal strain. Despite this, a primary budget surplus of 0.6% was recorded in 2023, although the overall budget deficit remained high at 8.3%.
The government’s ongoing debt restructuring process aims to alleviate the debt-servicing burden. Steps have been taken to gradually disburse unpaid loans and accrued interest from moratorium periods over the coming years, easing immediate fiscal pressures. As part of the restructuring strategy, measures such as the Domestic Debt Standardization Operation, implemented in 2023, have been crucial in managing public finances. However, restructuring is complicated by the fact that a large portion of the domestic debt is held by state-owned banks, pension funds, and other domestic institutions, making any further restructuring potentially costly in economic and social terms.
Efforts to manage debt have seen interest rates fall back to single-digit levels, particularly on Treasury bills, due to the government’s effective fiscal consolidation measures. Lower interest rates reduce the cost of borrowing, providing some relief to the government’s budget. The aim is to further stabilize the economy and lay the groundwork for inclusive economic growth by continuing with debt restructuring while maintaining manageable real interest rates.
Siriwardena also addressed criticisms about the domestic debt, stating that simplistic assessments of the country’s debt situation can be misleading. He argued that Sri Lanka’s deep economic crisis was partly caused by such flawed analyses, which failed to account for the complexity of managing government revenue, expenditure, and deficit financing. The Finance Secretary emphasized the importance of avoiding past mistakes and ensuring that future policy decisions are based on rigorous professional analysis and evidence-based approaches.
As the debt restructuring process nears completion, the government is optimistic about achieving economic stability. With agreements reached with sovereign bondholders and international creditors, Sri Lanka is set to proceed with the third review of the International Monetary Fund (IMF) aid program. Successful restructuring will not only reduce the debt-servicing burden but also pave the way for sustainable economic recovery and growth.
The Ministry remains committed to managing the country’s finances responsibly, prioritizing human rights, democratic governance, and anti-corruption measures, as it seeks to address past economic challenges and build a resilient financial system for the future.
