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Central Bank Governor Dr. Indrajit Coomaraswamy addresses the Compliance Symposium 2018 organised by the Association of Compliance Officers of Banks yesterday – Pic by Lasantha Kumara
By Charumini de Silva
Central Bank Governor Dr. Indrajit Coomaraswamy yesterday sought to rest concerns of economic turmoil in Sri Lanka, assuring that macroeconomic fundamentals remained strong and the Government remained on track to meet debt repayments.
Setting the record straight on Sri Lanka’s economy, Dr. Coomaraswamy gave an extensive rundown on the stability of the economy and steps being taken to meet debt repayments starting from next year, during his address at Compliance Symposium 2018 organised by the Association of Compliance Officers of Banks (ACOB).
“A few weeks ago some commentators were saying the economy was about to collapse, but it’s far from the truth. In terms of the macroeconomic management of the economy, there is stability and continuity. If you look at the key indicators, certainly one can’t argue that the economy isn’t robust, but at the same time it’s far from collapsing as well,” he stressed. Acknowledging it would be foolish to try to deny that political uncertainty did not have economic consequences through different channels, the Governor insisted that the fundamentals of the economy were in reasonable shape and it was business as usual at the Central Bank.“As all Sri Lankans, we hope that this current political instability is resolved quickly and we get back to business as usual. I can assure that it is business as usual at the Central Bank. While there is political upheaval we need to look through that. Although sentiments and confidence are being affected, the underlying economy is in okay shape. If we have a little bit of stability, we can push on,” Dr. Coomaraswamy said.
Noting that growth was too slow, he however said it was certainly on an upward trend where they expected 4% economic growth by the end of the year.
“The growth rate was 3.6% in the first half of 2018 but last year it was 3.2% and we are expecting to end this year with close to 4%, while the International Monetary Fund (IMF) is expecting 3.8%. Inflation is a little bit below our target rate of 4.6%, where headline inflation is about 3.8% and core inflation is even less. But there is no rampant runaway inflation in this country,” he added.
In terms of the external perspective, Dr. Coomaraswamy noted that the current account would widen closer to 4%, which was expected to be around 3% due to the spikes incurred in gold imports, motor vehicles and petroleum products during the year, which has now been controlled through a mixture of duty adjustments and macro-credential measures.
He also said rainfall had been such that the reservoirs were full, which means that the country can rely on hydropower more in the period ahead which will also benefit both the energy mix to moderate oil imports as well as to reduce the high energy cost involved in manufacturing to increase production and boost growth.
Asserting that the emphasis was on the exchange rate, the Governor pointed out that certain factors were beyond their control, particularly the normalisation of interest rates in the US, the outflow of capital from emerging markets and trade tensions.
“The risk appetite for emerging market capital flows has reduced and we along with other countries have experienced the consequences,” he said.
Assuring that the Central Bank was managing exchange rate flexibly to address the current account in balances, Dr. Coomaraswamy stated that the strategy was to use reserves carefully to ensure there were no disorderly adjustments.
“We will certainly adjust the exchange rate to address the current account in balances, but clearly adjusting one for one for capital outflows is not a useful exercise,” he stressed.
He also said the Central Bank was taking several steps to raise more funds and expand into Panda and Samurai bonds as well as initiate currency swaps with the central banks of Oman, Qatar and the People’s Bank of China for debt repayment and prevent the disorderly adjustment of the rupee.
Pointing out that Sri Lanka had to repay a sovereign bond of $ 1 billion in January and another $ 500 million in April, the Governor expressed confidence that the economy was in a position to meet all its debt obligations starting from next year and there were extra funds to prevent the disorderly adjustment of the rupee.
“We have about $ 640 million already in the kitty from the Hambantota Port long lease as well as a termed loan from China Development Bank. This can be carried over to next year to meet those obligations. In addition, a couple of months ago, the senior officials of the Central Bank and I, along with Chairmen and CEOs of five systemically important banks, went to Middle East countries including Abu Dhabi, Oman and Qatar. We spoke to their central banks and leading commercial banks,” he added.
Following the visit to the Middle East, Dr. Coomaraswamy said the three main state banks — Bank of Ceylon (BoC), Peoples Bank and the National Savings Bank (NSB) - would mobilise $ 750 million before the end of the year.
“We have $ 640 million carryover and $ 750 million will come before the end of this year through the three state banks and that is more than enough to pay off the $ 1 billion international sovereign bond in January. In addition, we have got a termed loan from the China Development Bank at very attractive terms, which can upscale $ 500 million and that money will come in February,” he pointed out.
The Governor also said they were in discussion with the central banks of Oman, Qatar and the People’s Bank of China about a swap arrangement, while initial steps have been taken to issue a Samurai bond.
According to the Central Bank, Sri Lanka has $ 7.7 billion, which is roughly about four months’ imports. The international benchmark is three months.
“We do have pressure to make sure that the rupee doesn’t get adjusted disorderly and to repay debts. We are pretty confident we can manage this situation,” Dr. Coomaraswamy stated.
