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Sri Lanka debt crunch to be met by tight spending

COLOMBO, Sept 4 (Reuters) - Higher debt repayments next year will reduce Sri Lanka government's ability to increase economic growth, the government said on Monday as it unveiled an eight-year economic policy plan.

It pledged to implement fiscal reforms to achieve medium to long-term targets for macroeconomic stability and an improved investor climate.

Unproductive spending will also be eliminated from the budget and state-owned enterprises restructured to let them operate as commercially viable and accountable enterprises.

But debt is the immediate problem.

Sri Lanka is facing a debt crunch as most of its expensive commercial loans start to come due next year. Foreign debt repayments will grow to a record $4 billion in 2019 from this year's $2.42 billion, finance ministry officials have said.

"The bunching of external debt repayments from 2018 requires tight budgetary control," the government said in the pollicy statement.

"Due to this lack of fiscal space, economic growth can no longer be driven by government spending. Growth will instead require expansion of tradable activities, driven by private investment to service external debt."

The external debt rose to 79.3 percent of the gross domestic product (GDP) last year from a 71.3 percent in 2014. However the government has planned to cut it to 70 percent by 2020.

The government has blamed "colossal borrowing" by the previous government for the spike in the debt services.

But former president Mahinda Rajapaksa has defended large-scale borrowing, saying it was needed to rebuild infrastructure after a 26-year civil war ended in 2009, investing in things such as ports, railways, highways and power plants, mostly through financed by Chinese loans.

President Maithripala Sirisena, who unseated Rajapaksa in an election two years ago, has already converted the debts of a loss-making $1.5 billion Chinese-built port into equity to reduce the debt burden.

Moody's Investors Service in July said Sri Lanka's credit profile will remain constrained by its large debt burden and very low debt affordability, combined with contingent liability risks from state-owned enterprises.

(Reporting by Ranga Sirilal and Shihar Aneez Editing and Graphic by Jeremy Gaunt.)