Public debt management distracted beyond control
Public debt management in almost all countries suffers same non-curable headache. Its prime symptoms relate to debt stock, maturity profile, cost, liquidity and market behaviour prevailing beyond control of the public. However, politics of debt management can carry diverse stories and narratives.
At the dawn of the year 2026, the new debt management office of the government (PDMO) of Sri Lanka took-over the 75 years old headache of public debt management carried out by the Central Bank from its inception in 1950. The Central Bank being the monetary authority of the country had the ample legal and operational teeth to mange both debt and monetary system behind the debt easily. The Central Bank's job was quite convenient as the monetary system established in 1950 to be administered and regulated by the Central Bank was built on public debt which is the outcome of the fiscal operations whereas the Central Bank also enjoyed some fiscal powers and coordination.
As a result, money and debt were managed as two sides of the same monetary coin. In the recent decades, both money and debt were developed into markets largely to be driven by the principle of the market-based price discovery as regulated by the Central Bank to accommodate its wider macroeconomic objectives mandated by the Monetary Law Act. This has replaced the directed price discovery channels pursued by the Central Bank through insider means from time to time. However, the Central Bank with such wider monetary, fiscal and economic powers failed in its management of both money and debt resulting a complicated default of debt in April 2022 that caused immense social and economic losses to the general public where no one has dared to estimate such losses so far.
Therefore, the task of the PDMO not having such fiscal, monetary and regulatory powers by no means is an easy journey. The only work it can attends to at present seems to be attempting to deal with the same debt management headache in the same money and debt markets now driven independently by the Central Bank under the neoliberal ideology without any reference to public debt or fiscal needs and its socio-economic contribution. Therefore, what the PDMO is now engaged in is largely the usual rollover of debt profile inherited from the Central Bank at what ever costs decided by the money market cartel operating under the Central Bank (Read previous article).
Therefore, this article provides some highlights on the nature of debt trap that has caught the PDMO based on Treasury bill and bond auctions conducted up to Mid-September this year. The foreign debt trap is not covered in the article as it entails a different mechanism between the government and the Central Bank running with a different monetary and macroeconomic risk profile.
Treasury bill Auctions (see the chart below)
Treasury bill debt management is a daily/weekly headache for rollovers of existing bill stock at whatever existing market prices. Therefore, the PDMO does not seem to possess any medium or long-term strategies to manage the bill market for cost-efficiency.
Yields at weekly auctions under the PDMO have largely moved to accommodate the Central Bank interest rate policy as before. This is well seen from the recent policy interest rate shock of 1% hike on 26th May and its immediate transmission to auctions. Although some deceleration in yields was reported in later weeks, the world-wide speculation of the US Federal Reserve rate hike of 0.25 on 16th September pushed Sri Lankan yields by 11-15 bps on the same day morning before the rate hike was announced by the Fed in the afternoon.
Inflation and money market liquidity do not seem to have any major impacts on yields and demand. The money market had ample excess liquidity further supported by the Central Bank's intra-day liquidity facility for settlement of bids although both inflation and market liquidity managed by the Central Bank were highly volatile and out of its monetary control. Although the government is usually blamed for such volatilities in the past, the fiscal discipline with the IMF fiscal rules highly praised by all corners at this time should save the government from the blame.
In this context, the sovereign risk premium (auction yields above the overnight policy rate) rising from around 8 to 140 bps is a significant concern which is not justified by the official fiscal performance statistics reported in the media.
Treasury bond debt management is a medium to long-term or structural headache without any prescription. The only benefit it gives is the ability to absorb the money already printed for fiscal spending for a long period of time and the space provided to recycle it for new spending in productive sectors.
However, this benefit comes at an unmanageable cost as highlighted from following charts.
- Bond issuances have been largely for medium-term maturities of 4-8 years causing rollover problems.
- The bond ladder/profile is highly skewed in few years indicating a significant bunching cost. Maturities in 2028, 2029, 2030, 2023 and 2034 are the largest indicating rollover challenges. The year 2028 that is scheduled to begin repayments of restructured foreign debt stock is also the year due for the largest bond maturities (i.e., Rs. 2,154 bn or 13.2% of the current bond stock of Rs. 16,278 bn). Unless the government finds new foreign borrowings to service foreign dues in 2028, domestic financing will be extremely challenging the country's monetary conditions and fiscal operations.
- Auctions conducted during the past 12 months have added Rs. 2,291 bn to maturities from 2030-2039 where 36% of it has got bunched in the maturities due in 2030. As a result, the bond bunch in 2030 has risen to 10% of the bond ladder from 6% in the last year (end of Oct 2025).
- The rise in auction yields from the level of 10%-11% from the month of May beyond 12% despite ample money market liquidity is a significant cost concern.
- The sovereign risk premium (over the call money rate driven by the monetary policy) rising sharply from 2% to 4% is unjustified by the rhetoric of fiscal discipline and macroeconomic stability marketed by the authorities under IMF reform agenda.
- The estimated annual coupon payment on the current bond stock (as at end of August 2026) is around Rs. 1,600 bn where 43% is on maturities falling in 2027-2030. The increase in coupon payment as compared to the bond profile at the end of October 2025 is about 6.3%. Therefore, rising coupon cost is a significant debt management concern as new bonds have to be issued for coupon payments.
The high volatility in the money market driven by the monetary policy operations is the cause for rising cost of debt management as reflected in rising yields and sovereign risk premia. The objective of monetary operations to keep the call money rates around the overnight policy interest rate (OPL) has miserably failed as seen from large deviations of the call money rate.
In fact, the conduct of frequent repo auctions has pushed call money rates up against the OPL principle. Central Bank overnight repos mostly around Rs. 40-60 bn in July to September have offered an yield premium around 50 bps over the standing deposit facility rate (SDFR) of 8.25% to mop up the excess liquidity. This shows that the monetary policy has failed to manage the market liquidity at stable levels for orderly functioning money market which is the prime target of monetary operations.
Data also reveal that monetary operations, money market liquidity and inflation are highly inconsistent despite the underlying monetary policy story.
In this monetary environment, the cost of debt management is beyond the control as the PDMO is unable to resort to any market liquidity control instruments despite the Treasury reporting large surpluses.
Therefore, the PDMO has no option but to lean with the evolving tighter monetary and money market conditions in months and years ahead because it does not possess strategies and instruments to challenge the existing monetary system. This reflects further rise in the debt management headache without any relief medicine for an indefinite period of future. Therefore, no one should expect any wonders from the PDMO to resolve the public debt problems cited in neoliberal economics.
Overall view
Modern world's money or currency is the trusted debt or promissory notes to pay (IOUs). Therefore, debt is the source of money. In modern state monetary systems, public debt is the source of the supply legal tender or currency which is the base or high-powered money most trusted by the public. The money so created by the public debt mostly prevails in forms of currency notes and coins, bank reserves at the Central Bank (known as market liquidity) and tradeable government securities which are state-issued moneys being the core of the monetary system. The rest of the system also creates private moneys on the use of state-issued money as reserves on the trust of exchange between private moneys and state moneys without a major cost.
Therefore, in modern monetary systems, governments do not borrow from private money creators to spend as they in fact spend through the creation of own currency to the monetary system. Therefore, the PDMO does not borrow to fund the government but it only recycles some of currency reserves held by the private sector into tradeable liquid securities with a return. This operation provides the government with a space for a new round of spending through money creation net of taxes. Tax is the other instrument used to recycle the currency from the monetary system for fiscal operations.
Therefore, what the PDMO is engaged in is in fact is a macroeconomic liquidity management and not necessarily raising debt from the private sector for the government spending. This reveals that money, debt and thereby monetary system are essentially political instruments that are available to governments for public interest where central banks are only political agents of governments to undertake accounting management. What is most necessary to ensure the debt management efficiency is to assess the use-side of the spending, debt and money as to what extent the general public has economically benefitted for employment, real income and living standards in a sustainable manner. In that context, popular macroeconomic stability analyses and statistics are only superficial information that is not useful for debt management efficiency assessments.
Therefore, until the debt management is understood and the system is reformed in this reality, no debt manager is able to cure its headache but will only play popular debt politics by following meaningless neoliberal debt sustainability analyses.
P Samarasiri
(35 years of experience in staff class in the Central Bank, inclusive of Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 13 Economics and Banking Books and a large number of articles published.)
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