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Sri Lanka pays the largest proportion of its revenue as interest payments

11 Jan 2022

By PublicFinance.lk Sri Lanka’s debt burden measured in terms of debt to gross domestic product (GDP) is comparable to countries such as Greece, France, and the US. A high debt-to-GDP ratio may not be overly problematic if interest cost is not high and the government has access to capital markets to roll-over maturing debt. Sri Lanka’s debt-to-GDP ratio is problematic due to having high interest payments, limited access to global financial markets, and having diminishing revenues. In comparison to other countries considered, Sri Lanka has the highest interest cost as a percentage of government revenue, reaching an unprecedented level of 71.7% in 2020. While Sri Lanka pays more than two-thirds of its revenue as interest cost, Japan, a country with a much higher debt-to-GDP ratio of 256.2%, pays only 8.2% of its government revenue as interest cost. In 2019, Sri Lanka’s interest to revenue ratio was second only to Lebanon.  In 2020, Lebanon defaulted on its debt, thereby bringing its interest to revenue ratio down to 18.3%. Therefore, in 2020, with an interest to revenue ratio of 71.7%, Sri Lanka has become the country with the highest share of interest to government revenue. Such a dramatic rise in the interest cost-to-revenue ratio was driven primarily by the decline in government revenue. In 2020, Sri Lanka’s interest cost increased by Rs. 78 billion compared to 2019, reaching Rs. 980 billion in 2020. However, government revenue declined even further by Rs. 522 billion compared to 2019, to Rs. 1,368 billion in 2020.  Such a high interest cost-to-revenue ratio limits Sri Lanka’s fiscal space for spending on priority areas, including on education, health, and social protection. Interest payments, along with salaries and pensions, are an example of Sri Lanka’s high levels of non-discretionary public expenditure, which are not easy to reduce in the short term. Therefore, revenue enhancement measures will play a key role in efforts to curtail the budget deficit. Note: The countries were selected based on whether their debt to GDP ratio were more than 80% and were further narrowed down based on the availability of data for 2020. Sources:  Ministry of Finance, Annual Report (2020) Ministry of Finance, Annual Report (2019) International Monetary Fund (IMF), World Economic Outlook (2021) (PublicFinance.lk is a platform for public finance related information in Sri Lanka. This platform intends to bridge the gap in information and understanding of public finance by providing insights and analysis on Sri Lanka’s public finance. PublicFinance.lk is run by Verité Research, an independent think tank that provides strategic analysis for Asia in the areas of economics, politics, law, and media)  

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