Sri Lanka's Return to International Capital Markets: Dr. Indrajit Coomaraswamy’s Perspective

Former Central Bank Governor Dr. Indrajit Coomaraswamy has emphasized the necessity for Sri Lanka to re-enter international capital markets to prevent further economic contraction and close the country’s external financing gap. Speaking at the first of a series of orations marking the 75th anniversary of the Central Bank of Sri Lanka, he defended his administration’s past decisions regarding International Sovereign Bonds (ISBs) and their role in delaying a debt default.

The Need for International Capital Market Borrowing

Dr. Coomaraswamy argued that Sri Lanka must return to international borrowing at some point, despite opposition from certain quarters. He highlighted that borrowing through ISBs provides a more structured and lower-cost financing option compared to volatile foreign investments in rupee government securities. Without such funding, he warned that Sri Lanka would experience severe economic compression, affecting both consumption and investment, thereby worsening economic difficulties for businesses and citizens.

“And ISBs are probably the most effective way of doing it unless we sell ourselves to some donor who will bankroll us, which I don’t think is a good outcome,” he stated.

Defending Past ISB Issuances

During his tenure as the Governor of the Central Bank from 2016 to 2019, Dr. Coomaraswamy oversaw significant sovereign bond issuances, which increased Sri Lanka’s outstanding sovereign bond debt from US$ 5.0 billion in early 2015 to US$ 15.0 billion by the end of 2019. In 2019 alone, US$ 4.5 billion was raised through bond issuances.

He justified these borrowings by citing two main reasons:

1. Reducing Reliance on Volatile Portfolio Investments: The government sought to minimize dependence on foreign portfolio inflows into rupee-denominated government securities, which were highly volatile and created uncertainties in policymaking. These inflows dropped from US$ 3.5 billion in early 2015 to about US$ 600 million by the end of 2019.
2. Managing Currency Swaps and Debt Maturities: The country reduced its dependency on central bank currency swaps, bringing them down from US$ 2.5 billion to US$ 500 million over the same period. Additionally, ISBs helped extend debt maturities and lower borrowing costs, as ISBs carried interest rates of 6–7 percent compared to rupee bonds, which stood at around 12 percent at the time.

Addressing the 2022 Debt Default

Dr. Coomaraswamy strongly refuted claims that excessive bond issuance was a key factor behind Sri Lanka’s 2022 debt default. Instead, he asserted that these borrowings helped delay an inevitable default by allowing the country to refinance existing debt obligations.

“If we hadn’t continued to borrow or issue ISBs, we would have defaulted much earlier because we were literally borrowing to repay the debt,” he emphasized.

He cited multiple studies that indicated at least 90 percent of the fresh borrowings during that period were used to settle existing debts rather than for new expenditures.

The Road Ahead for Sri Lanka

Dr. Coomaraswamy acknowledged the difficulties of returning to international capital markets but maintained that Sri Lanka must eventually regain investor confidence and secure external financing. He pointed out that the markets were still willing to lend to Sri Lanka in 2019, largely due to the economic reforms and macroeconomic stabilizations under the International Monetary Fund (IMF) programme and the Active Liability Management Act.

As Sri Lanka continues its path toward economic recovery, Dr. Coomaraswamy’s remarks highlight the complexities of debt management and the importance of strategic borrowing. While some may remain skeptical of future ISB issuances, the reality remains that external financing is crucial for stabilizing and rebuilding the nation’s economy.

What are your thoughts on Sri Lanka’s approach to international borrowing? Should the country re-enter capital markets or seek alternative financial strategies? Share your insights in the comments.