Cabraal Assures Fixed FX Rate Regime Until Year End
By Ishara Gamage
It is only a few weeks since Ajith Nivard Leslie Cabraal took office for the second time as the Governor of the Central Bank of Sri Lanka (CBSL). During this short period of time he has been busy directing his officials to formulate the CBSL macroeconomic plan and outlook for the next six months and beyond. Much publicised as the Roadmap, it was launched on 1 October. He is confident that it will help build confidence in the local and foreign investor community regarding the ailing Sri Lanka economy.
In an exclusive interview with Ceylon Today and our sister paper Mawbima, the Governor of the CBSL said, in his view, given relatively strict conditions and complex methodologies of the IMF programme, there is scope for the Sri Lankan economy to progress without such external assistance. Accordingly, the Roadmap is expected to build a formal economic framework that will provide the confidence of local and foreign investors, he said.
He emphasised that the Sri Lankan economy has the potential to overcome the current macroeconomic imbalances in the country in the face of future economic growth-based revival strategies and gradual eradication of the corona epidemic with the continuing vaccination process. Given below is the conversation we had with Governor Cabraal.
Why did you feel it necessary that you should address such a wide field of issues?
A: We gave a clear vision of the Sri Lankan economy. It must be said that all the facts contained herein and the monetary value were presented analytically based on the true and achievable goals. It should be noted that we have sources that can fully confirm the foreign exchange inflows mentioned in our road map. We have had a very good response.
Many believe that the CBSL has played a vital role in giving a clear purpose and direction to a place that was in a state of turmoil. According to the Finance Act, the CBSL is responsible for the economic stability of the country. Therefore, our vision was to prevent such instability and to bring some stability to the country's exchange rate and interest rates.
If we had not presented this without a broad vision, there would have been an accusation that some sectors of the country's economy did not pay attention at a time when instability was prevailing. That is why we have taken steps to go beyond the fundamental issues of the country such as debt and exchange rates and present our shortterm vision to the world, covering all sectors under the purview of CBSL. Different people may have different opinions about the pros and cons of the content of my Road Map presentation.
Also, this should not be incomplete as I presented it a few weeks after I became the Governor of the CBSL. But the CBSL has always believed that this Road Map presentation should be an all-inclusive one. You are well aware that the CBSL has a large number of experienced economists with more doctoral degrees than any other institution in Sri Lanka. It is with the help of all these people that this analysis and vision was formulated. These people supported me in making this presentation with great dedication working day and night.
The current foreign exchange crisis in Sri Lanka has been going on for nearly two years. During this period, the measures introduced to save the country's foreign exchange did not show any success. Are you satisfied with the measures taken to maintain the stability of the foreign exchange market?
A: We have already brought the exchange rate to a stable level which is around Rs 198-203 per dollar. Bankers have already agreed to maintain that range. We hope to maintain the exchange rate at the current level for the next three months without introducing new variables to the economy. We hope to manage the current flow of foreign funds wisely in the country and carry out the relevant work in collaboration with the banking and financial institutions. This is an advantage for exporters as well as importers.
In the presentation you implied that those exporters not converting the dollar proceeds to LKR would be penalised via a doubling of the tax rate. Is this wise when we should applaud exporters?
Is the tax rate already in the forthcoming Budget proposals? A: As of now there is a significant gap between exports and the receipt of those export earnings in Sri Lanka resulting in LKR. The Economic Research Dept. within CBSL has reviewed this matter and we have all the data to prove our position. There is a gap between exports whose purpose is to generate foreign currency and receipt of such foreign currency in Sri Lanka at the completion of the export and payment by the Buyer.
This practice of not converting to $ is not undertaken by all but by only some of the exporters. I have checked with many of the large exporters who agree and confirm such conversion of $ to LKR. CBSL compute this gap to be $ 3 billion. The exchange rate has over – depreciated from 160 to LKR 203.
Tell us a bit about the release of $ 50 million to clear some 400 containers of essential food items?
Are you ready to lift vehicle import restrictions? A: We have now lifted all restrictions on the import of milk powder and other essential consumer goods. We also took steps to release funds for the importation of petroleum and other essential items with the intervention of the Central Bank. As a result, the environment is now conducive for anyone to carry out essential imports without hindrance.
We are taking steps to import petroleum in the future under bilateral loan agreements. We are also gradually relaxing the existing import barriers for small and medium scale industrialists. In an environment where all macroeconomic fundamentals are being transformed to a better level, they will have the opportunity to do business with their usual energy in the future.
However due to the volatility of these exchange rates and import restrictions, the prices of motor vehicles (MV) in the country have risen abnormally and create a unnecessary bubble. It would be nice if we could create a system to prevent these situations and bring cars back. This is not the time for that. We are considering creating a system to ease the import restrictions on MVs if we can find foreign funds from abroad to finance the transactions as well as settling the customs duties in foreign currency.
In view of the poor credit rating status of Sri Lanka and the progress being made as a middle-income country, we have been barred from low cost funding measures. In such a scenario, what is the Government's approac to attracting foreign direct investment and low-cost funding schemes?
A: Through this Roadmap, we have outlined the way forward for the macroeconomic stability in the country. Through the trust that it builds, we look forward to working on a multilateral and bilateral basis for local and foreign investment initiatives.We look forward to promoting our investment plans and opportunities on a regional basis through regional seminars in the future.Our goal is to attract about a billion new dollars; especially for government securities. We already have the stability of the exchange rate for that.
During my previous tenure as the Governor of the CBSL, foreign investors accounted for more than 12 per cent or US$ 3 Bn of Government bonds. They asked for further increase in their purchasing limits. The previous government was of the opposite opinion. As a result, foreign ownership of government securities has fallen sharply today.
Today, some say it will be difficult to attract investors other than a confidencebuilding mechanism based on the IMF?
A: There were IMF programmes then too, but foreign investors came because of our plans. There was a time when funds like Franklin Templeton who invested in Government securities were considered thieves. We must attract them back.
Why are you so opposed to a programme based on the International Monetary Fund (IMF)? It gives the country international trust as well as financial discipline.
A: All these people are coming up with IMF based proposals without adequate knowledge of the conditions and other criteria associated with it. If the people are ready to go for such a programme and get into trouble, we can think of such a programme. We have now announced the steps to be taken with this road map along with the timelines. Can the IMF launch such a clear plan? Can we say for sure who among them are the delegates coming to this country? I also have some understanding of dealing with IMF. So I say clearly that without them we can get out of this crisis. Many of the countries that supported it, today have failed.
What efforts has CBSL taken to repurchase debt now heavily discounted?
A: You said CBSL was unable to find sufficient investors willing to bailout. Please give some detail of the process adopted. We will consider buying back those ISBs or International Sovereign Bonds if they fall within our price range.
We are not going to buy it directly through secondary market. We are waiting for the situation if the price is going to give us a huge capital gain then definitely we will be ready to buying it through our joint lead managers. So, nothing wrong with it. We will give a cut-off point to decide for them to sell their bond investments.
Domestic debt with stateowned enterprise (SOE) is now over 115 per cent of GDP – COVID is not yet over and hence Government will continue to incur that expenditure – what is the expectation for domestic debt given usual deficits and COVID?
A: We will take steps to find a solution to this crisis through the gradual retirement of existing credit stocks and non-debt creating sources such as underutilized assets sales. Unfortunately, Sri Lankan economy has not grown in the last 5 years. When I resigned as the Governor of the Central Bank in 2014, the country's gross domestic product was worth $ 80 billion.
The sovereign bond stock was worth US$ 5 billion, or 6.25 per cent of GDP. Today the country's gross domestic product is worth US$ 82 billion. The sovereign bond stock was worth $ 15 billion, or 18 per cent of GDP. We did all this under the International Monetary Fund programme. Then the debt will increase and remain the same as the value of the GDP.
If the value of the GDP increases as the debt increases, that is not a problem. That is what happened here. For example, it is a problem if the income does not increase as the debt of an individual increases. That is what has happened to the country today. We have identified the problems of the country very well.
Isn't Sri Lanka also a victim of the infinite printing process that is being carried out by more than 100 Central Banks of countries around the world by introducing a new economic policy called Modern Monetary Theory? As a result, the exchange rate is declining. Inflation is rising, isn't it?
A: The CBSL prints money in such a way as to cause the least damage to the economy. There may be some seriousness in it. We are well aware of this. We all know the good and the bad side of it.
It is true that more than 100 countries have printed more money than they need during this epidemic. The Central Bank has printed money and purchased Treasury bills to fulfil the Government financial needs. We are going to minimise that consequences. In the future we hope to control this and take the necessary corrective measures.
With this prevailing Covid-19 epidemic, what kind of debt relief strategies do you hope to implement in the future? Would you like to explain the proposed private sector equity investment fund?
A: We all believe that this corona epidemic will be gradually eradicated. We must act on this belief. Accordingly, the government or the CBSL should intervene in the economic sectors affected by this pandemic.
If such relief is not provided, they will face a major crisis. We took further steps to provide relief to those sectors in addition to extending debt moratoria as well as the postponing the parate execution activities of the banking sector. Accordingly, CBSL allocated Rs 15,000 million to activate their loan relief programme. CBSL hopes to provide relief by releasing this Rs 15,000 million in a manner that does not harm the borrowers as well as the stability of the lending banks and financial institutions.
This will provide greater relief to all, especially small and medium scale enterprises. In this context, we are intervening to provide these reliefs to cover all sectors of the economy that are in crisis due to this epidemic as a whole. Some people need internal as well as external assistance to get out of this crisis; they need fresh capital to run their business in addition to existing moratoria. Therefore, we have decided to set up a private sector equity investment fund for betterment of needy entrepreneurs as well as the business start-ups. It will provide a relief on a long-term basis.
Proposed fund will run entirely by the private sector administration and management. CBSL will take the initiative with the assistance with the trade chambers, Institute of Chartered Accountants and other local and foreign equity investor groups such as angel funds and private equity providers. The government hopes to intervene by providing necessary tax relief.
How are you going to implement the failed finance company restructuring process as well as the finance sector consolidation process?
A For every collapsed company, action is being taken to find new investors. We hope to negotiate with their new investors and take the necessary steps to revive the companies. If not, we will have to liquidate them. At the same time, we have already taken the necessary steps to accelerate the financial sector consolidation process.