Sri Lanka has one of the highest real interest rates and Government debt interest payment rates globally, former Associate Professor of Economics at the International Institute of Social Studies, Erasmus University Rotterdam, Howard Nicholas said.
Nicholas told a meeting on the 2025 Budget organised by the Asia Progress Forum that the National People’s Power (NPP) Government faces significant pressure from the International Monetary Fund (IMF) and other Western nations not to pursue industrialisation.
Maintaining high real interest rates and substantial Government debt interest payments are strategic measures designed to prevent industrialisation, Nicholas said.
“However, industrialisation is the only path for Sri Lanka to escape its current debt trap. This is precisely what the US and the IMF do not want us to pursue. Their intention is to keep us trapped in debt,” he said.
Nicholas said that Government debt repayment typically accounts for around 41 percent of Sri Lanka’s Budget, significantly exceeding expenditure on welfare, industry, and agriculture.
“When discussing Sri Lanka, the IMF and many economists focus on primary surplus, which occurs when Government revenue (excluding debt interest payments) exceeds non-interest expenditure. They deliberately avoid highlighting interest payment levels because it reveals the true extent and causes of our debt,” he said. Sri Lanka also records one of the highest real interest rates worldwide. Real interest rates are calculated by subtracting the inflation rate from the nominal interest rate.
“Sri Lanka’s nominal interest rate stands around nine percent, while inflation is approximately a negative four percent, resulting in a domestic real interest rate of about 13 percent. While banks profit from these rates, Small and Medium-sized Enterprises (SMEs) cannot survive under such conditions,” Nicholas added.
He said that previous Governments relied on economic advisors who encouraged borrowing from international markets due to lower interest rates abroad. He cited former Central Bank Governor Indrajit Coomaraswamy, who recently acknowledged advising the Sirisena-Wickremesinghe administration to borrow extensively through international sovereign bond markets due to comparatively lower interest rates.
“However, this advice overlooked the risks associated with borrowing in US dollars, particularly the threat of economic collapse if exchange rates dropped, as in 2022. Currently, some experts are advising the NPP Government to borrow similarly. Unlike the Ranil Wickremesinghe administration, this Government genuinely prioritises the people’s well-being and should, therefore, proceed cautiously,” Nicholas said.
