International Monetary Fund
Two seemingly important factors cropped up at a Central Bank of Sri Lanka (CBSL) press conference chaired by Governor Professor (Emeritus) W.D. Lakshman yesterday.
They were that Sri Lanka has no plans to go for an International Monetary Fund (IMF) facility as a solution to its apparently weak balance of payments position. And the other, that, the performance of certain sectors of the economy was beyond the mandate of CBSL, but were in the hands of policymakers.
The IMF factor revolved round Sri Lanka’s foreign reserves having fallen to a 12-year low of US$ 4.1billion as at last month end.
When almost a similar occurrence took place 12 years ago in 2009, where the country’s foreign reserves had fallen to $1,082 million by end March 2009, Sri Lanka went for a $2.5 billion IMF facility. Consequently, due to the confidence reposed on the economy by the IMF, that saw the country’s foreign reserves position ending 2009 at a ‘strong’ $5,097million, boosted by net foreign inflows to the country’s financial account.
However, IMF facilities come with conditions, such as the free float of the rupee, without the country’s foreign reserves being expended to defend the local currency.
The rupee has been under increased depreciative pressure since the country liberalised the economy in 1977, made worse by the current account in the balance of payments being in a perennial deficit situation since 1978, led by a negative trade balance.
CBSL has countered this situation by imposing import restrictions, beginning with the COVID-19 Pandemic last year, where the rupee was under pressure led by net foreign outflows from the country’s financial account. That has resulted in the contraction of the trade deficit.
However, CBSL refused to give details as to where they thought that the country’s trade balance would be, by the year end, with CBSL’s Acting Director Economic Research Dr. P.K.G. Harischandra telling journalists to wait till next month, when CBSL’s 2020 Annual Report would be out. Government debt however, had grown close to 100 per cent of GDP last year, he said.
Nonetheless, Lakshman predicted that the economy will expand by between 5.5 – 6 per cent this year, aided by a lower base, where the economy contracted by a record low 3.6 per cent, last year. Growth will be complemented by non-debt inflows, the Governor said.
On the question of low tourism growth, where, however, neighbouring Maldives, despite COVID-19, was experiencing stronger tourism growth compared to Sri Lanka and whether such situations, including in certain other sectors of the economy, were due to factors beyond CBSL’s control, the Governor replied in the affirmative.
He said that answers to such situations were in the hands of policymakers. Howbeit, the Governor expected investments to rebound, complemented by the Colombo Port City, growth in merchandise exports, where exports in the first two months of the year, year-on-year, has almost reached pre-COVID-19 Pandemic levels and the contraction in imports.
Lakshman also expected services exports to grow, where Harischandra said that he envisaged tourism services exports to pick-up from July.
Meanwhile, the Governor emphasised that CBSL will maintain the current, low interest rate regime with the aim of giving an uplift to the economy, while inflationary pressure led by food inflation to be mitigated by improvements in the supply side. CBSL estimated that inflation in the medium term would be at the 4 – 6 per cent levels.
“We are beginning to see economic activity improve, private sector credit growing and uplift in employment, wages and domestic driven production,” said Lakshman, in the backdrop of the COVID-19 Pandemic which previously scarred the economy.
CBSL however, declined to say whether private sector credit growth will hit double digits by the year, compared to the present single digit growth scenario.
Lakshman also said that the Government and the CBSL are committed to external stability.
Howbeit, the challenges facing Sri Lanka is foreign debt servicing.
Foreign debt servicing according to CBSL, as at Sunday, stood at nearly US$1.2 billion in the calendar year to date. With reserves at $4.1 billion as at last month end, this $1.2 billion figure is equivalent to 29.27 per cent of the country’s total foreign reserves. Reserves as at last year end stood at $5.7 billion, a decline of 28.07 per cent ($1.6 billion) since.
Meanwhile, with another $2.8 billion foreign debt repayment due by the year end, equivalent to 68.29 per cent of the country’s current foreign reserves, it may be difficult for Sri Lanka to ‘survive,’ without an IMF programme.