Negative ratings reversal possible in next budget cycle: CB Chief

• Says recent downgrades by rating agencies “worrying”
• But next budgetary cycle to assist gradual reversal
• Growth to be supported by structural reforms in line with Govt. policies
• Wants strong entrepreneurial class to form joint ventures with foreign companies, boost FDI
• Insists economy should not only achieve numerical targets but also tangible social benefits

By Uditha Jayasinghe 

Expressing optimism of stronger growth this year, Central Bank Governor Prof. W.D. Lakshman has said he expects recent “worrying” downgrades by international rating agencies will be reversed after the next budget cycle and growth will be sustained through structural reforms in line with Government policies.Speaking at the Economic Outlook launch for 2020 at the Ceylon Chamber of Commerce (CCC) on Monday, Prof. Lakshman stressed that even though concerns had been expressed over fiscal slippage leading to larger budget deficits and current account deficits by analysts and most recently by the International Monetary Fund (IMF), he was confident that these concerns would be addressed.  

“Slow improvement is seen in the country’s external account. The decline in the trade deficit seen in 2019 is likely to continue into 2020. Foreign capital inflows are expected to grow with improved business confidence. The negative rating stances of rating agencies in 2019 are worrying. With greater political stability and expected budgetary improvements in the next Budget cycle these ratings are expected to gradually become positive,” he said delivering the keynote address. 

“The surrounding conditions seem to suggest that the realisation of these goals is not beyond us if we get ourselves organised. It is also our intention to steer the economy to achieve not only numerical targets but also to ensure that the journey of economic progress translates into tangible social benefits for all.” 

The IMF in its latest review released last weekend warned Sri Lanka had missed targets set for 2019 including the deficit and reserve targets, though the latter was just by $ 100 million. The Government by its own admission is struggling with public revenue shortages and has estimated the budget deficit at 7% for 2019. The IMF has projected the budget deficit at 6.4% and warned it could increase to as much as 7.9% this year. Due to the Government’s ambitious stimulus package, the primary deficit was also projected to widen to 1.9% of GDP in 2020. 

The Governor observed that economic activity in Sri Lanka remained subdued in the fourth quarter of 2019 but in 2020 a revival was anticipated supported by appropriate monetary and fiscal measures, improved business confidence, and political stability. 

A low and stable inflation environment, exchange rate stability at competitive levels, low lending rates and improved consumption and investment sentiment is likely to push the economy to reach its capacity in the medium term, he added. 

“The growth momentum of the economy will be sustained through structural reforms designed in line with the policy priorities of the Government.”  

He noted that domestic private capital, domestic State capital and foreign private capital needed to work in tandem to push forward sustainable growth. Incentives that have already been provided to encourage domestic private capital, which includes the SME moratorium, “indicates the Government’s intention to build a strong entrepreneurial class, who can provide the strong domestic partners for foreign joint ventures, which is a widely-used mechanism used for FDI inflows into a country”. 

“The assurance given that no State enterprise will be privatised indicates dependence on the State capital component of the coalition. If the institutional and personnel reforms planned for this sector work right, the SOE sector should become a partner to private capital and on the whole extremely useful to achieve targeted development objectives.”  

The Governor was optimistic that the Government would move away from policies championed by the IMF and World Bank, but acknowledged Sri Lanka still needed to link up with global value chains to become more competitive and experience sustained growth.   

“Linking our production systems with the global economy would be a powerful driver of growth. The key means of this integration is to move into global value chains. Such links can support us by empowering the production process with better technology, knowhow and a mature skill set. Sri Lanka will need to upgrade to the production of higher value added products, services and sectors. In industrial sectors we are yet to see Sri Lanka carve out a robust sustainable and high value addition niche for itself,” he said.