CB to go to market in 1Q to build debt buffer

• Says building liquidity will assist in managing inflation and interest rates
• Wants strong Fiscal Responsibility Management Act, believes Governor should stand strong 
• Liability Management Act to allow 
• Govt. to borrow above limit to tackle debt bunching 
• Backs strong controls on excess borrowing, Govt. committed to use funds from any asset sales for debt repayment 
• Divestiture funds to be put in two accounts for local and foreign debt payment  

In an effort to tackle a spike in domestic debt, the Central Bank is preparing to go to the market in the first quarter of 2018 and will throw its support behind a Liability Management Act being formulated by the Government. 

Central Bank Governor Dr. Indrajit Coomaraswamy, responding to questions, noted that they have been fortunate in not having to repay domestic debt in the second half of 2017, allowing it to build a buffer for the high level of domestic debt to be repaid in 2018. 

“We want to go to the market early next year and that liquidity will allow us to take some pressure off inflation and interest rates,” he said, insisting that the focus would remain on improving growth. The Governor also reiterated his support to giving “teeth” to the Fiscal Responsibility Management Act, which could include a clause for the Governor to resign if inflation targets were not maintained.

Acknowledging that fiscal consolidation was the duty of the Finance Ministry, he nonetheless pointed out that a Fiscal Responsibility Management Act should function parallel to strong fiscal rules and stressed that if its counterpart did not comply then the Governor was justified in increasing interest rates.

“One of two things will happen - either the Governor will be sacked or the Finance Ministry will return to fiscal consolidation,” he said.     

The second key piece of legislation the Government is considering is a Liability Management Act to tackle bunching of external debt from 2019-2022, during which time rating agencies estimate that Sri Lanka will have to repay $ 18.3 billion.   

“The Liability Management Act provides for borrowing over and above the Government’s borrowing requirement for any given year. At present the Appropriation Act sets a ceiling on borrowing and that is limited to the deficit, which means you can’t borrow for liability management. What we want to do is raise some money to address the bunching of external debt repayments and some of it for domestic repayments as well,” he said, insisting that the ceiling set by the Appropriation Act would not be removed completely.

“Therefore the new Act would specifically raise money for liability management. That’s the whole rationale but does not completely take off the borrowing limit because that is there for a purpose. Given our public debt dynamics we need to create space to borrow over and above the requirement for any given year to mobilise additional resources for liability management.”

Discussions have proposed limiting the borrowing ceiling to 20% above what is specified in the Appropriation Bill but the Governor concurred that such measures should be strictly controlled.   

“There is a Government commitment to use funds from any divestitures of assets for liability management. The Hambantota Port money for example will go into a foreign currency account for external liability management, any local currency raised will go to another account to be used for domestic liability management. The Government has committed itself to create these two accounts, whereby it earmarks money from the sale of divestments to support liability management. The Act will be for a purpose and will not be to give out subsidies,” he said.