- Effective institutional transition crucial to ensure debt sustainability
Last week, discussion sparked at the Committee on Public Finance (COPF) regarding the discrepancies in Sri Lanka’s Government debt targets, as presented in different documents by the Ministry of Finance.
According to the Medium-Term Debt Management Strategy (MTDS), which was published alongside Budget 2025 in February, Sri Lanka aims to achieve a Central Government debt-to-GDP ratio of 71% by 2029. This figure was calculated based on a scenario analysis conducted by the newly-established Public Debt Management Office (PDMO).
Conversely, the other budget documents and fiscal estimates presented to Parliament indicate a completely different target: a public debt-to-GDP ratio of 95% by 2032, which aligns with the International Monetary Fund’s (IMF) Debt Sustainability Analysis (DSA). One would naturally ask: why such a large difference? This exact question was posed by the COPF Chair and members to the officials from the Treasury and the PDMO.
During the COPF session, PDMO officials attempted to clarify the discrepancy. They explained that the MTDS focused on Central Government debt, while the IMF’s framework addressed public debt, which included not only Central Government borrowings but also Government-guaranteed debt and debt incurred by State-Owned Enterprises (SOEs).
So yes, there is a definitional difference. Public debt has a broader scope and thus often has a higher debt-to-GDP ratio. However, it is not a massive difference as reflected by the data from the Central Bank and PDMO itself.
Historical data from the Central Bank supports this. For instance, public debt figures often exceed Central Government debt by 5-10 percentage points. However, given the IMF programme’s recent restrictions on SOE borrowings, this gap has narrowed and is expected to narrow further. That makes the current divergence between the MTDS target and the Treasury’s projections harder to justify on definitional grounds alone.
In short, that’s not why numbers significantly differ. Numbers differ because the MTDS seems to have been prepared without properly accommodating the DSA assumptions and other macroeconomic dynamics. The MTDS is prepared based on the World Bank and IMF’s MTDS Analytical Tool (AT), while the DSA is prepared based on the Sovereign Risk and Debt Sustainability Framework for Market Access Countries (MAC SRDSF).
Although these are two different toolkits serving two different purposes, debt management strategy should be consistent with the DSA and macroeconomic assumptions used in the DSA. In the case of Sri Lanka, this consistency seems to be lacking as implied by the discrepancy of Government debt estimates. The PDMO also vaguely attempted to imply that assumptions differ. But as explained above, underlying assumptions of the MTDS and DSA ought to be consistent.
“The MTDS is a more targeted debt management framework, focusing on the specifics of how the composition of debt should be managed over the medium-term. Determining an effective DMS requires that the performance of various financing strategies be evaluated under a given path for key macroeconomic variables, which should be consistent with that used in the DSA,” note the World Bank and the IMF in ‘Developing a Medium-Term Debt Management Strategy Framework (MTDS) – Updated guidance note for country authorities,’ published in 2019.
The issue at present could be driven by the PDMO being able to fully factor in the overall macroeconomic overperformance Sri Lanka has recorded in the past 2-3 years into its MTDS assumptions, while the IMF staff are not fully able to do that and update their forecasts for Sri Lanka’s debt-to-GDP ratio.
The ongoing IMF programme and the debt targets used in the debt restructuring were based on their initial DSA forecasts done in 2022/2023, which they institutionally cannot alter significantly within the ongoing programme. It is possible that when the ongoing programme ends, the debt-to-GDP forecasts of the PDMO MTDS and IMF DSA are able to converge more closely.
It’s not merely a data discrepancy
This gap in figures and the official back-and-forth reveals several underlying problems regarding Sri Lanka’s public debt management and the PDMO.
- Lack of coordination within the Treasury regarding the Government’s debt targets – The budget estimates, annexures in the budget speech, and the MTDS seem to be prepared in silos.
- Lack of agreement on how these targets are forecast – It is important to note that there are two distinct toolkits used for the MTDS and DSA. While those serve different purposes, there has to be consistency in terms of the assumptions in using these toolkits to derive forecasts. Thus, the PDMO and other departments of the Ministry of Finance need to have common agreement about assumptions used.
- Weak institutional capacity at the PDMO – It is crucial to point out that the PDMO is a new institute that was set up only last year. A discrepancy of this nature is a consequence of lack of capacity and lack of clarity on technicalities involved in public debt management. Current PDMO officials need more comprehensive training with the support of foreign experts to gain a detailed understanding about public debt management and tools used in it.
Add to that the fact that Sri Lanka does not have much experience in preparing Debt Management Strategies (DMS), particularly MTDS. Before this, there was only one MTDS prepared by Sri Lanka in 2019 by the Central Bank’s Public Debt Department. So the current strategy is only the second attempt.
Why a separate debt office?
The creation of the PDMO represents a structural shift. Its goal is to centralise debt management under one roof. Until recently, Sri Lanka’s public debt was managed by a patchwork of institutions:
- Issuance of domestic debt securities – like issuing Treasury bills and bonds – was handled by the Central Bank’s Public Debt Department. It was responsible for conducting auctions.
- Bilateral and multilateral foreign loans were managed by the External Resources Department (ERD) of the Finance Ministry. The ERD also maintained a comprehensive registry of foreign loans, outstanding debt, and loan repayments. Prior to the establishment of the PDMO, the ERD published foreign loan disbursement reports monthly and different sections of the ERD dealt with different multilateral creditors and bilateral creditors.
- Commercial foreign loans, such as International Sovereign Bonds (ISBs) and foreign currency term facilities, were managed jointly by the Central Bank and Finance Ministry.
- Repayment of these debt securities and loans were handled by the Treasury Operations Department.
- SOE loans were managed by SOEs themselves, sometimes with input from the Finance Ministry. In some cases, debt was transferred to SOEs to paint a prettier picture of Central Government debt on the books, as in the cases of the Hambantota Port, the Puttalam power plant, and the Mattala airport.
This fragmented structure lacked transparency and coordination. Now, the Government, under the advice of the IMF and the other two major multilateral lenders, is attempting to consolidate these functions under the PDMO.
As revealed in COPF discussions, the issuance of Treasury securities will soon move from the Central Bank to the Treasury. Commercial foreign borrowing responsibilities will also shift away from the Central Bank – once the main actor in ISB issuances – and into the hands of the PDMO.
This is no minor administrative shuffle. It is a major institutional transformation. Such major transformation requires institutional capacity to match that transformation.
The PDMO has started training its staff through the Central Bank’s Public Debt Department to manage tasks like Government securities auctions and bidding processes. But training alone won’t be enough.
Why capacity matters more than ever
Managing public debt is not just a bureaucratic function – it’s a high-stakes, high-skill operation. In Sri Lanka, much of this complex work has so far been handled relatively smoothly with significant support of the Central Bank, even though, globally, debt management is no longer seen as a central bank’s core responsibility.
Managing public debt requires navigating both local and global financial markets. It demands a high level of technical expertise, operational efficiency, risk analysis, legal knowledge, and data security. These are not things that can be improvised.
The Central Bank succeeded in large part because it had both the systems and the people to manage these operations. And let’s be honest – those people are paid much more than the rest of the public sector. This pay scale difference is a key factor.
The Central Bank offers significantly higher salaries than most other parts of the Government, and for good reason. If you want technically competent professionals dealing with billions in public funds and dealing with complexities of the financial system, you need to pay them accordingly. That pay gap is one of the reasons Sri Lanka’s debt securities issuance and management, despite broader governance issues, has not been chaotic.
Now, as the PDMO takes over, it’s crucial to remember that this job involves daily interactions with financial markets. The institution responsible must stay two steps ahead, not one step behind. The debt must be managed transparently, but also smartly – always with the goal of minimising long-term debt servicing costs.
Building a real PDMO – not just on paper
Establishing the PDMO was the right decision. But it was done without fully thinking through the technical and institutional foundations necessary to make it succeed.
Currently, PDMO officers are mostly drawn from the Sri Lanka Administrative Service and the Planning Service – from within the Ministry of Finance. While these officers are vital to general public administration, most of them do not have technical expertise in public debt management, debt-related laws, and financial markets, as they were not recruited for the purpose of public debt management.
To bridge the gap temporarily, a few Central Bank officers have been seconded to the PDMO. But this is not sustainable. The Central Bank is meant to function independently and lending its officers to a Finance Ministry department could compromise that independence in the long run.
In such a context, what can be done about it? Solutions aren’t quite straightforward, but there are a few fundamental structural changes that can be done as a start.
- The PDMO should have a separate service structure, with its own salary scale, ideally aligned with the Central Bank. This essentially means a high salary level.
- Recruitment should be based on technical competence, with specialised roles in economics, finance, law, and risk management.
- The Government must be willing to pay for skill or risk a poorly-run debt office that could create more problems than it solves.
- Obtain technical assistance from other countries’ debt offices, multilateral agencies, research institutions at global level, and universities.
Public debt management isn’t just about numbers on a spreadsheet. It’s about navigating complex global and domestic forces while making sure the country stays solvent, credible, and stable. It requires people who not only understand financial markets but can also handle market-sensitive information with integrity and discretion.
That kind of skilled labour doesn’t come cheap.
If the Government tries to run the PDMO without having the adequate skilled team in place, it will have many adverse impacts on the country’s debt management. The success or failure of the PDMO depends heavily on its capacity, which in turn depends on the Government’s willingness and ability to attract individuals with technical competency, experience, and integrity to the PDMO.
Sri Lanka is now a middle-income country and if economic recovery continues, it will soon be an upper-middle-income country. Thus, Sri Lanka will have to constantly rely on international financial markets as a source of Government financing.
This means Sri Lanka will have to deal with global players in the financial sector who have portfolios worth billions of dollars and will be required to handle large asset and liability books. This is a challenging exercise for any emerging market country. Not having the sufficient capacity to do this makes it harder.
Public debt management isn’t just about obtaining loans and repaying debt. It involves more complicated government cash flow management while minimising the costs, risks, and exposure. For these very reasons, PDMOs in other countries work closely with the Treasury cash management office.
Thus, for smooth functioning, the PDMO needs to be integrated well into the Treasury system. To put it simply, the PDMO cannot operate in a silo from the other institutions and departments.
Don’t repeat past mistakes
Sri Lanka has consistently neglected State capacity, even as it expanded its public sector. We now have a vast administrative machinery, but one that suffers from a shortage of skilled professionals, in large part due to uncompetitive salaries.
We have already seen how this played out in the country’s weak tax performance, and how poor supervision opens the door to corruption. Turning a blind eye to the capacity needs of the PDMO would be repeating the same mistake, but this time in a far more dangerous domain.
The good news? The PDMO has not become fully operational yet. It’s not too late to make the necessary course corrections. But doing so will require political will, bold decisions, and a real commitment to building a functional, professional institution.
If Sri Lanka is serious about getting its debt management right, it must build a PDMO with the right people, pay, and protection from political interference. Otherwise, we’re setting up another shell institution – big on paper, but hollow in practice.
(The writer is an economist and lecturer attached to the University of Colombo and focuses on research on public debt, Chinese lending, and the political economy. He can be reached via umesh@econ.cmb.econ.ac.lk)