Former CBSL Governor Coomaraswamy Suggests IMF Programme
By Rajiesh Seetharam
On average, Sri Lanka has to pay over four billion US dollars per year, in the next five years, to service its debts. Former Central Bank (CB) Governor Dr. Indrajith Coomaraswamy states that an IMF programme and debt rescheduling are the best options to get out of the debt and forex crises. At a virtual conference, he said “In the present situation, it would be difficult to fund the external financing gap even with bilateral funding like swaps, term loans.
So the viable option could be to go to the IMF. The former Central Bank Governor noted that under an IMF programme, in the current conditions, Sri Lanka would get a External Fund Facility of at least USD 800 million per year for three years, and in addition the World Bank (WB) and Asian Development Bank (ADB) would support via project funding. “Without an IMF programme, you cannot expect support from the WB or ADB.” Dr. Coomaraswamy further noted that it is the time Sri Lanka should also consider debt rescheduling along with an IMF programme.
“The general issue with debt rescheduling is losing access to International Capital Markets. However, Sri Lanka has already lost access with its ratings being downgraded.” An IMF programme would mean reforms and a certain level of austerity, he said adding, “Now, it’s a choice between choosing the austerity measures to be taken according an IMF programme or austerity measures taken presently like import and capital controls currently undertaken. With the present import and capital controls, we are suppressing domestic investments.
We are making life difficult for exporters by having an overvalued exchange rate. It’s like asking exporters to run 110 metres in a 100 metres race. We are basically subsidizing foreign producers at the expense of our exporters and our import competing industries. So we need to have a competitive exchange rate, and to have it stable, we have to fix the budget.” The former Central Bank Governor further stressed the need to maintain buffers in the external reserves. “Sri Lanka came up with the lowest fiscal stimulus package in the region during the pandemic, due to low external reserves.
Even countries with lower GDP per Capita than Sri Lanka had a higher stimulus package. As the world is becoming uncertain due to various issues such as climate change, pandemic, rising or fluctuating commodity prices, it is important to maintain a reasonable amount of external reserves, a lesson to be learnt from the 1997 East Asian Crises.” Over the last decade Sri Lanka had been raising funds via International Sovereign Bonds (ISB), and when it suddenly stopped with the lower ratings, Sri Lanka went short on dollars.
The former CB Governor noted that over a period of time revenue as a % to GDP should be increased to 15%. “CB had to support the economy due to demand and supply destruction caused due to the pandemic. However, as the economy recovers from the pandemic, CB may not be able to continue its expansionary accomodatory policy. Sri Lanka cannot continue deficit financing as it will transform into inflation. So we have to find some other ways of financing the budget, while the long term solution is to increase revenue by exports and FDI, however it may take time. Thus the current option could be an IMF programme.”