Something to consider then, given how global monetary policy is still very much on an inflation targeting dynamic - so even if they aren't successful, higher yields can offset redistributive effects.
Something to consider of course, is existing stock being affected by inflation and only flows being affected by yields.
In SL, massive duration shortening meant that any redistributive benefit of inflation was probably reduced significantly.
Particularly the context of rising inflation AND rising domestic yields feels like they work in opposite directions.
Inflation helps balance sheets, yields harm them. Opposite redistributive effects.
This also went alongside massive shifts to deal with the rising inflation - chiefly tighter monetary policy (and tighter fiscal policy in these countries).
All this also affects the redistribution.
But what rose was domestic debt as local yields spiked.
So in fact, new debt was added at a pretty quick rate. Meant that although external debt as a % of GDP fell, domestic debt rose.
But this inflation came largely alongside currency depreciation. LKR saw something like a 45% loss in value.
Meant that value of external debt in LKR terms rose.
But as a % of GDP, the old stock was now smaller.
A big part of this - inflation leading to NGDP growth. In 2022, inflation peaked at approx 100% (after a backward looking rebasement) with NGDP growing some 35% in 2022.
In mid-2022, SL's public debt was on track to be anywhere between 120-140% of GDP.
Actual end-2022 value was closer to 110%. By end-Sep 24, this comes to at or just below 100%.
Pretth significant reductions, especially from that 140% top point.
Countries going through default know this well - but also show additional complications.
Using the example of SL to illustrate
That's then another critical consideration - fiscal shifts aren't purely on public finance but on the sociopolitical as well.
Sri Lanka's so far is of great success on the first front, but how will it face the second? What will that mean for the idea of fiscal change itself?
The costs of these are probably a big part of the electoral shifts in my view as well. That thereby means there's a question of the continuity of SL's fiscal strength
.
Will political pressures push SOME change? Early indications are SOME, but how much?
For me, this is probably the key reason for Sri Lanka's fiscal strength - the lack of alternatives.
The cost of all this? As mentioned previously, nominal growth has slowed down. Compared to original expectations of 33tn, 2024 NGDP looks likely to barely hit 30 tn
A key reason why deficits tended to be present in Sri Lanka's past was the ability to finance them easily - monetization, state owned credit flows, and foreign capital.
Right now, none of these are available which necessitates fiscal measures despite general unpopularity.
But if you look at 2024's data (from CBSL below), this still shows this improvement continuing.
Jan-Sep revenue is on track to hit or exceed the latest IMF target while expenditure is on track to undershoot expectations across recurrent and capital spending.
So it's not just a base effect alone
Of course, this is very much helped by the very low base Sri Lanka started from.
Whether the same would have been possible starting from a higher base and without the "benefit" of a deep crisis to push massive fiscal change is a different question.
Overall, it's been large revenue improvements and strong expenditure constraints - both being quite broad based.
Following is from 2nd IMF review
For Sri Lanka itself, there is no question that this is unprecedented.
Fiscal strength has rarely been a feature of the SL economy, and this is easily the highest primary surplus the economy has seen.
The questions - what drove this, can it continue, and is it replicable?
But since then, the primary surplus has only done even better. Jan-Sep data alone gives around 2.5% - assuming NGDP is around the original expectations (might be lower due to weak inflation).
Quite possible for the full year number to be even higher.
To give some context to the size of this improvement, as at the previous IMF review, the projections were for a 3-year adjustment (from 2021 to 2024) to be close to 7% of GDP.
Very much a massive adjustment - probably close to the 9th decile in terms of all adjustments.
Sri Lanka's current fiscal adjustment is a pretty remarkable development - one of the biggest ever.
Given the broad-based nature of this, a great point to take a deep dive of this to understand fiscal adjustments in the context of sovereign debt stress.
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Here is a preliminary, still rudimentary starter pack on sovereign debt—very much open to any suggestions you may have for expanding it!
