Govt. feasts on EPF, ETF, NSB

Public debt management goes awry:
* Three institutions harboring public funds account for 96% of T-bond investments
* High interest rates, tight rupee liquidity in 2011 hits bond market

Around 96 percent of the government’s total borrowing requirement via Treasury bonds in 2011 came from captive sources such as the EPF, ETF and National Savings Bank, the Central Bank says.

"The high interest rates and the tight liquidity condition which prevailed in the market towards the latter part of the year made the T-bonds market illiquid. Hence, there had been less demand for T-bonds in latter part of 2011. Consequently, only Rs. 514.6 billion or 95.45 per cent of initially planned borrowings of Rs. 539.2 billion under T-bonds was raised in 2011. Further, nearly 96.00 per cent of the total borrowings made through T-bonds in 2011 came from captive sources such as EPF, ETF, and NSB. Due to the above mentioned developments, Rs. 79.6 billion was raised through new issuances of T-bills, on book value terms, nearly twice the initially planned new issuance of T-bills in 2011," the Public Debt Department of the Central Bank said in a new report released last week.

The actual total borrowings of the government was maintained within the gross borrowing limit approved by the Parliament and stood at Rs. 994.1 billion in 2011.

"The composition of the 2011 borrowing, however, deviated from the original plan. Accordingly, the share of gross borrowings from foreign sources was reduced to Rs. 322.8 billion compared to the initial plan of Rs. 338.9 billion while the total funds borrowed from domestic sources in 2011 was increased to Rs. 671.3 billion against the initial plan of Rs. 658.1 billion," the Central Bank said.

The gross borrowing limit of the government of Sri Lanka for 2011, approved by the Parliament under the Appropriation Act No. 20 of 2010, was Rs. 997.0 billion, an increase of Rs. 17.0 billion against the 2010 limit.

Out of the gross borrowing requirement, Rs. 338.9 billion was expected to be raised from foreign sources while the balance Rs. 658.1 billion from the domestic sources.

On net basis, total borrowing requirement for 2011 was estimated at Rs. 433.7 billion, with Rs. 143.8 billion from foreign sources and the balance of Rs. 289.9 billion from the domestic sources.

Actual gross borrowing was maintained within the approved annual borrowing limit at Rs. 994.1 billion in 2011. Total borrowing from domestic sources exceeded the target by Rs. 13.2 billion and stood at Rs. 671.3 billion. Total borrowing from external sources at Rs. 322.8 billion, was lower than the target by Rs. 16.1 billion.

Total outstanding debt stock stood at Rs. 5,133.4 billion as at end 2011 recording an increase of Rs. 543.2 billion compared to the level as at end 2010.

As a percentage of GDP, total outstanding debt stock declined from 81.93 per cent as at end 2010 to 78.46 per cent as at end 2011. The decline reflected in both domestic and foreign debt; Domestic debt ratio declined from 45.80 per cent to 42.86 per cent and foreign debt ratio decreased from 36.14 per cent to 35.60 per cent .

The share of domestic debt in total debt stock was 54.62 per cent while that of foreign debt was 45.38 per cent as at end 2011.

Economists have for long argued that there was a conflict of interest with the Central Bank managing public debt while trying to maintain price stability at the same time.

In January 2010, Central Bank governor Ajith Nivard Cabraal said reckless spending by the state would threaten both the low interest rate regime and low inflation which prevailed at that period and squeeze out credit to the private sector which was necessary to fuel higher economic growth.

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