Government borrowing prior to Public Debt Management Act
Until recently, borrowing activities of the Government of Sri Lanka and State-owned entities were broadly governed by a combination of the following few enactments:-
During this period, the Foreign Loans Act together with the Monetary Law Act laid down the procedural framework for the Government (or the relevant public corporationii or public enterprise) to exercise its powers to borrow from foreign parties. The issuance of debt securities such as treasury bills and treasury bonds were governed by the Local Treasury Bills Ordinance and the Registered Stock and Securities Ordinance.
The Foreign Loans Act and the Monetary Law Act mandated that upon the advice of the Monetary Board of the Central Bank of Sri Lanka and the approval of the Cabinet of Ministers, either the President of Sri Lanka or any person authorised by the President could enter into a loan contract or a guarantee whereby the full faith and credit of the country could be bound.
In recent times, the inadequacy of this framework was evident when extensive and unsustainable foreign currency borrowing by State actors amongst other factors led the country into declaring a state of default on its external debt in April 2022.
Enactment of the Public Debt Management Act
The challenges posed by a fragmented legal framework and institutional arrangements led to the enactment of the Public Debt Management Act which, when it was brought into operation on 25th November 2024, marked a significant development in Sri Lanka’s fiscal and legal framework.
A commitment under the IMF’s Extended Fund Facility Arrangement and the World Bank’s Development Policy Operation, the Act is designed to enhance transparency, accountability, and sustainability in public borrowing and introduced critical changes to the way the Government of Sri Lanka and other State entities engage in debt-related activities.
Key features
(i). Establishment of a Public Debt Management Office
One of the Public Debt Management Act’s most notable features is the establishment of the Public Debt Management Office (PDMO) within the Ministry of Finance vested with exclusive responsibility for the formulation and execution of the national medium term debt management strategy.
This strategy must be approved by the Cabinet and tabled in Parliament and is intended to guide borrowing decisions, ensuring they align with the government’s fiscal objectives and risk tolerance. The debt management strategy will serve as a framework for making informed and sustainable borrowing choices.
In addition to direct borrowings by the Government of Sri Lanka, any borrowing by state-owned enterprises or other public corporations that is guaranteed by the Government are also regulated by the Public Debt Management Act. This ensures that contingent liabilities are properly accounted for and that all public sector borrowing aligns with the broader debt sustainability framework.
(ii). Regulation of issuance of debt instruments
The Act also provides a legal basis for the issuance of debt instruments, both in local and international markets. The consolidation and publication of information on debt securities issued by the Government and public entities will lead to increased investor confidence and reduce legal risks.
The implications of the Act on the existing legal framework which deals with the Government issuance of debt securities namely the Local Treasury Bills Ordinance and the Registered Stock and Securities Ordinance however, remain to be seen.
(iii). Greater Transparency
To promote fiscal discipline, the Act provides for the publication of the annual borrowing plan and the medium-term debt management strategy formulated by the Public Debt Management Office. These documents must be published and tabled in Parliament, enhancing transparency and allowing for greater legislative and public scrutiny of debt-related decisions.
The Act requires the Public Debt Management Office to maintain accurate and timely records of public debt and to report regularly to Parliament. This provision aims to provide stakeholders with clear insights into the government’s debt position and management practices, fostering accountability and trust.
(iv). Regulation of Government Guarantees and On-Lending
Recognizing the fiscal risks associated with government guarantees and on-lending, the Act introduces a regulatory framework to govern these activities. It sets out criteria and procedures for issuing guarantees and lending to state-owned enterprises, aiming to mitigate potential liabilities and ensure that such financial commitments are aligned with national debt sustainability goals.
Conclusion
The Public Debt Management Act represents a crucial step toward fiscal consolidation and sound public financial management in Sri Lanka. It not only reshapes the institutional landscape of public borrowing but also imposes a more disciplined, transparent, and strategic approach to managing the country’s debt obligations.
Citations: https://tinyurl.com/2bp5pue3
Himali Mudadeniya
Partner & Head of Banking & Finance