Economist warns debt strain, stagflation risks rising

FORMER Central Bank Deputy Governor Dr. W.A. Wijewardena has warned that Sri Lanka is entering a more vulnerable phase where Government debt sustainability, interest rate dynamics and growth prospects are increasingly exposed to external shocks, particularly from the ongoing Middle East conflict.

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He said Sri Lanka's fiscal and external financing model remains heavily dependent on continuous borrowing and refinancing, making it sensitive to shifts in interest rates, liquidity and growth.

"Sri Lanka is also operating with a very large credit card. If it cannot pay the credit balance, the family will find that it cannot use this credit card anymore," he said, drawing a parallel between Government financing and a household dependent on revolving credit.

Dr. Wijewardena, speaking at a webinar hosted by the Institute of Certified Management Accountants of Sri Lanka (CMA), explained that the Government's ability to service interest payments from current revenue remains intact, but the rollover of maturing debt depends on market conditions and investor appetite. If domestic liquidity tightens or external financing conditions weaken, refinancing capacity could become constrained.

He said this risk is heightened by the possibility of rising interest rates, which would increase borrowing costs and reduce the Government's ability to issue new debt at current yields.