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It’s counterintuitive, but low inflation, like in Sri Lanka now, has the effect of worsening a debt crisis. A country where prices are rising fast will also inflate away its local currency debt. Inflation is terrible for people, and for lenders. But for a borrower in a debt crisis, it has the opposite effect. One reason for Sri Lanka’s relative debt level to decline in the few years to 2013 was high inflation. The second reason for that fall is the brief spurt of high GDP growth in the three years immediately after the conflict ended. There is a third reason why the debt-to-GDP ratio is growing, which is also somewhat invisible. More than half of Sri Lanka’s debt is foreign currency debt. When the Rupee depreciated by 15% to the dollar in 2018, the local currency value of the foreign debt increased by that amount. Sri Lanka borrows at around 6.5% in international markets, but depreciation adds that much more to the outstanding debt stock and the cost. On the economic front, low growth and high debt are Sri Lanka’s post- war challenges. That 10 years after the war’s end Sri Lanka’s downward trending economic growth is forecast to hit a record low in 2018 is ominous. Sustainable economic growth is the headline measure of a peace dividend. It’s also one that has so far eluded Sri Lanka.

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