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Governor Indrajit Coomaraswamy presenting the Central Bank Road Map: Monetary and financial sector policies for 2017 and beyond
By Chathuri Dissanayake
Central Bank yesterday sounded “cautiously optimistic” of the country’s growth prospects for this year, influenced by several external and internal downsides and positives.
With a projected economic growth of 5.5% to 6%, Central Bank Governor Dr. Indrajit Coomaraswamy said the country’s economy picked up during the latter part of the year to measure an estimated 4.4%.
However the projected growth for 2017 comes with caution on significant downsides from the prevailing volatile global economic climate and possible slowdown in the agricultural sector and limitations in power generation due to prevailing weather conditions.
“It is too early to tell how significant these will be. But the fact that the economy is stabilising, we hope, will result in greater investment activities with both the domestic and foreign investor communities. It is part of a natural progression as the economy becomes more stable that you see investment coming in and amplifying growth,” he said.
He also highlighted that the Colombo Financial City (formerly Port City) investment, and the pending East Container Terminal in Colombo will boost construction activity and growth, although the main benefit is expected in three years time.
Presenting the Central Bank Road Map for 2017 to outline the monetary and financial sector policies for the coming years, Coomaraswamy said that the Government has established the right framework for economic expansion and now needs practical measures to follow.
“Overall, inflation has been contained within our mid-single figure target of 4% to 6%. Meanwhile, core inflation continued its upward trend in 2016, reflecting the firming up of demand conditions in the economy and the revisions made to the tax structure in the latter part of the year,” Coomaraswamy highlighted.
The CB Chief also said that despite considerable depreciation pressure on the rupee, it has remained relatively stable in 2016 compared to the previous year, recording a depreciation of 3.8%.
Further relaxation of exchange control measures are also in the cards for this year.
Speaking of the proposed changes to the Exchange Control Act he said that the Central Bank is looking at creating a framework.
“What we are looking at is a framework where we look at our inflation rates and the rates of our trading partners and see where it can go within that framework to have a competitive exchange rate. We will move slowly. We don’t want to make any sharp disruptive changes,” he said.
The move by the Government to gradually relieve the Central Bank from debt management duties for the State was seen as a positive decision by the Governor as he claimed that the task created a “conflict of interest” for the Central Bank.
“Pressure is heavy on the Central Bank to borrow at low cost finance options, but at the same time manage interest rates based on the market,” he said. Positive about the restructuring process of the Central Bank advocated by Finance Minister Ravi Karunanayake, he said the related policies need to be modernised.
The Central Bank also aims to engage in policy and regulatory revision this year, with focus on amending the regulatory framework for all financial institutions. The amendments to the Banking Act are aimed at giving the Central Bank more supervisory control, reinforcing its enforcement powers for violation of the regulations and directions issued under it.
The CB Chief said it is clear that stability in the economy is broadly on track, as evident in the improving macro-fundamentals. “As the monetary authority and the apex regulator of the financial system of Sri Lanka, we are making our best efforts to ensure stable economic conditions on a sustainable basis.
Some of these policies may be perceived as painful in the short run, but they are meant to strengthen the medium-term stability of the economy. This is crucial for the long-term prosperity of all Sri Lankans.”
“As an agent for stability, the Central Bank would continue to play its role through clear and consistent policies to ensure overall macroeconomic stability in the country. The frameworks that are being developed are intended to support this,” Dr. Coomaraswamy added.
Sri Lanka becoming more prosperous with improvements: CB
Sri Lanka has become more prosperous last year along with improvements in the economy and business climate and the well-being of the people, according to an indicator introduced by the Central Bank to assess the overall status of prosperity in the country as a whole and in each of its provinces.
The prosperity, measured by the Sri Lanka Prosperity Index (SLPI), which is a composite indicator that measures and compares the level of prosperity of the country and across its provinces, has improved to 0.864 in 2015 from 0.804 in the previous year, the Central Bank reported.
“The SLPI improved along with the improvements in Economy and Business Climate and Well-being of the People sub-indices, while there is a moderation in Socio-Economic Infrastructure sub-index,”
SL not in the ICU but clearly in hospital: CB Chief
Central Bank Governor Dr. Indrajit Coomaraswamy yesterday likened the on-going IMF program to Sri Lanka being in hospital, though not in the ICU.
During his presentation on CB’s Road Map for 2017 and beyond, the Governor said that, in what is
often termed the Asian century, Sri Lanka was the only country, other than Afghanistan, in the Asia/Pacific region with an IMF program. Having an IMF program is the economic equivalent to being in hospital, he said.
“We are not in the ICU but clearly in hospital. The remedial treatment is known and it is encouraging that it has commenced. The International Monetary Fund (IMF) itself has recognised that progress has
been made in stabilising the economy. Improved fiscal performance has been at the heart of this improvement,” Dr. Coomaraswamy said, adding that the Finance Minister and his team deserve credit for this.
“However, the continuing challenge is to have the clarity of purpose, focus and determination to implement the necessary changes. It has to be a national effort. The potential for accelerated development is clearly evident. The Government’s plans, programs and projects, as set out in the Prime Minister’s Statement and the Budget Speech have sign-posted the way ahead. However, the task now is to continue to turn the good intentions into reality. This journey ahead also requires a rebalancing of economics and politics in economic decision-making, if we are to stay on course,” the Central Bank Governor said.
Earlier on, he also said it was naïve to believe economics can be separated from politics. “No country, no society has been able to achieve this. However, we need to ask why Sri Lanka, which was second to Japan in Asia, on most socio-economic indicators, has slipped so far behind today. We need to ask why this is.”
CB chief says defending rupee not "sensible"
Reuters: Sri Lanka's central bank governor Indrajith Coomaraswamy on Tuesday said defending the rupee with foreign exchange reserves "doesn't seem sensible" as it has always been followed by a sharp depreciation in the currency.
Coomaraswamy's comments come days after the central bank, which has previously had defended the currency, said that "depreciation of the rupee has not only negative implications, but also positive implications on the Sri Lankan economy".
The island nation's monetary authority has defended the currency, mostly with borrowed reserves, from time to time over the years without much success.
Indeed, the central bank spent $4.2 billion in 2011-2012 before a 14% depreciation and 2.1 billion in 2015 before a 9% fall in the rupee, Coomaraswamy said.
The IMF, which has supported Sri Lanka with a $1.5 billion programme, has long called for a flexible exchange rate, to the political distaste of successive governments who did not want to see the currency fall.
President Maithripala Sirisena's government has given some flexibility to the market since being elected in 2015, although dealers said the central bank controlled the currency verbally through so-called moral suasion.
Now the government, faced with a debt and balance of payments crisis, has given the central bank a freer hand to signal it will be less likely to intervene in the future.
The central bank had flagged the move in December, in a separate statement, saying "allowing the exchange rate to depreciate is not necessarily a bad approach in economic management".
Coomaraswamy built on that theme on Tuesday, telling reporters in Colombo: "It doesn't seem sensible to spend large amounts of reserves defending the currency if you are going to depreciate."
"There is an underlying pressure on the rupee all the time. The way to get over that is to either increase our exports of goods and services, or get more remittances, more non-debt creating foreign direct investment and institutional inflows."
The central bank said in a policy document said the experience had clearly demonstrated that maintaining "an overvalued exchange rate at the expense of external reserves" is unsustainable.
A smooth market based exchange rate would prevent highly disruptive adjustments after a period of stable rates artificially maintained by continuous intervention by the central bank.
"It is time to stop this pattern and commence building up of external reserves through sustainable foreign exchange inflows," the governor said, quoting from the document.
The rupee was under pressure last year due to higher imports and foreign investors exiting government securities.
Foreign investors sold 43.64 billion rupees worth of government securities, net, in the 2016 calendar year.
The central bank had raised the spot currency reference rate to 150.00, a record low against the U.S. dollar on Friday.
