Sri Lanka will be tightening policy spaces in the monetary, fiscal and external fronts amidst subdued economic performance under the present economic and political situation in the country, Central Bank sources said.
Private sector led growth is to be facilitated with prudent, consistent and far reaching reforms that support increased productivity in the economy, officials said.
However, a push to adopt more populist measures with an election in sight will be restrained by Sri Lanka’s programme with the IMF till mid-2019 and the challenge of early refinancing of the country’s medium term debt settlements from 2019, economic analysts said.
Recent experiences have once again displayed the importance of strengthening the economy through structural transformation, while improving the country’s macroeconomic fundamentals, they pointed out.
The postponement of much needed structural reforms will only lead to the Sri Lankan economy lagging behind its regional peers, amidst increased vulnerability to internal and external disturbances, the Central Bank said.
Therefore, it is essential that such reforms are expeditiously implemented within a transparent framework for Sri Lanka to progress as an upper middle income economy where its human and physical resources are fully utilised in a more productive manner.
In this hiatus, there will likely be a limited appetite for pushing ahead with economic reforms. As trade-offs are weighed between reforms and the possibility of an electoral backlash, politicians will be stuck between voter demands for the immediate accrual of benefits, while actual benefits are likely to be felt only after a lag, they emphasized.
For the government, that lag time is narrowing swiftly. In this scenario, the temptation to switch from economic reforms to politics-as-usual will be high.
"We hope that Sri Lanka will be more successful this time around in breaking its pervasive populist cycle to retain the gains on the macroeconomic front, they claimed.
Sri Lanka's tea smallholders, who account for 76% of the national tea output, are facing serious problems which they say could adversely affect the whole industry.
The price of the green leaf has been dropped to Rs.70 to 80 at present from Rs.90 to 105, they claimed. "Tea smallholders are facing some serious problems due to a rapid drop in prices and high maintenance costs that will directly contribute towards reducing the national tea output in the future.
Unless prudent measures are taken to resolve these problems, Sri Lanka's tea industry is at risk of collapsing according to a senior member of the Sri Lanka Federation of Tea Smallholder Development Societies.
This situation has arisen following sanctions imposed by the US against Iran and its impact on Ceylon tea purchasing countries in the Middle East, Russia and Turkey, he said.
The currency depreciation due US economic policy has hit the countries in the Middle East he said adding that Turkey’s currency has depreciated 4 o per cent.
Tea smallholders are facing serious issues of increasing cost of production, mainly driven by higher labour costs, which is making the sector unsustainable. This is also preventing re-investment in land development and replanting, which is expected to hurt industry productivity and quality of "Ceylon" tea, in the future.
Sri Lanka is in talks with Qatar and Oman for foreign exchange swaps, Central Bank Governor Indrajit Coomaraswamy said.
Sri Lanka’s foreign reserves has increased to USD 8 billion with the securing of USD 1 billion foreign currency term financing facility from China Development Bank (CDB), at highly competitive interest rates, Central Bank announced recently.
Sri Lanka is also exploring possibilities of entering into currency swap agreements with trade partners aiming to shore up exports and bring down the trade deficit which is putting pressure on the rupee, he told a forum organized by Asia Securities, a Colombo-based brokering company.
Dr. Coomaraswamy said that inflation was low even though the budget deficit was slightly higher than expected. However, the Governor noted that they would expect a primary surplus.
The Central Bank debunked speculation that the country’s economy was collapsing and requested the public not to panic. “The Central Bank is confident that it can professionally handle the country’s current exchange rate issue and debt situation,” Central Bank Governor Dr. Indrajith Coomaraswamy told at a press conference at the Central Bank (CB) auditorium yesterday (02).
“We have now come to a better position through aggressive intervention in the market and through various measures to curtail luxury imports.The pressure on the exchange rate will abate,” Dr Coomaraswamy said. “There is enough technical excellence in this organisation to come out of the situation we are now in and we will,” he said.
According to the Central Bank, the exchange rate had depreciated at a faster rate of 9.7 percent so far in 2018. “The Government and the Monetary Board of the CB adjusted the gold and vehicle duties and most recently introduced a raft of measures to cut the non-essential imports,” the Governor said briefing on the interventions made to defend the Rupee.
“These are intended to be temporary measures. As soon as there is stability in the market, these can be taken off,” he commented. “Let me recall that in 2015 about USD 3.2 billion was spent to defend the Rupee, but the Rupee depreciated by 9.5 percent. In 2011-2012 USD 4.1 billion was spent, but the Rupee depreciated by 15 percent.At that time, there was also a credit ceiling imposed without discriminating luxury goods, essential goods, intermediate goods and capital goods,” the CB Governor said.
“In 2018, so far we have had 9.7 percent depreciation of Rupee, but on net basis we have only sold USD 184 million to the market.We have protected the reserves. The measures orchestrated this time have been very carefully selected, and we have not touched capital goods, essential imports and intermediate goods. This is a far more nuance and sophisticated intervention compaird to that crude credit ceiling which was imposed in 2012,” Dr. Coomaraswamy remarked.
“In 2015 and in 2012, there were fiscal slippages which contributed to the currency depreciation, but this time there had been no slippage. This situation arose basically due to external developments,” he added.“I hope that the situation would stabilise now.There is tremendous amount of misunderstanding and ignorance about the exchange rates in this country. I have worked in about 20 countries.The attitude to the exchange rate in this country is unique. People think if the currency is depreciated the economy is about to collapse. Our reserves, growth and inflation are ok. From where does this economy collapse then?” he asked.
“Our reserves have come down a little because of debt repayments and some interventions in the currency market, but we are anticipating USD 1 billion within a week from the China Development Bank and we are hoping to raise USD 500 million more from the Panda Bond and Samurai Bond. We are planning to have another International Sovereign Bond issuance before the end of this year. There is plenty of money that is going to come in terms of reserves,” the Governor said explaining that the CB hopes to increase foreign reserves from the current USD 7.3 billion to USD 8.3 billion towards the end of the year.
The CB Governor stressed that having competitive exchange rate is crucial to increase exports, adding that increasing exports is necessary to come out of the debt, which is “a major millstone around the economy”. “Without getting exports up, we are going to be in this mess in terms of debt forever and ever” he noted.
“Now it has actually come to a competitive rate, but I understand that it can have impact on the cost of living. We have to take that into account. Fortunately, this currency depreciation has come at a time when inflation pressures are muted in the economy. Food price inflation is very low. Though currency depreciation may lead to bus and train fare hikes and prices of imported goods going up, its impact is relatively low. The domestic production is competitive and this limits the import prices of imported goods going up,” the CB Chief analyzed.
The CB Governor stressed the need to stop subsidising foreign producers at the expense of our local producers. “Our imports have doubled compared to our exports because of the overvalued exchange rate, which we had for years and years. Having a competitive exchange rate is critical to support our domestic producers. There is nothing wrong in importing goods, but we must be able to earn to pay for the imports,” he added.
He announced that the Central Bank decided to maintain policy interest rates at current levels at 7.25percent and 8.50 percent because of the relatively slow economic growth, tight liquidity conditions in the market, high nominal and real interest rates and keeping the inflation rate within the target.“Tight monetary policy conditions are observed globally with the continuous strengthening of the US dollar. These have accelerated capital outflows from emerging economies resulting in depreciation of local currencies,” the Central bank announced.
“There had been arguments in favour of increasing interest rates as other countries such as India, Indonesia and Philippines have done that, but we must keep in mind that those countries have very high economic growth and lower nominal and real interest rates where as Sri Lanka’s current economic growth rate was only 3.7 percent in the first half of the year,” the Governor commented.
“Given that Sri Lanka is a twin deficit country, in terms of budget deficit and current account deficit, the chances that Sri Lanka attracting new money at this juncture is very minimal indeed. By increasing interest rates, we will not be able to attract new money or keep the money already invested,” the Governor justified the decision to keep the policy interest rates on hold.
He also said that the country’s economic growth would not exceed 4 percent this year.Responding to a question by a journalist on the purpose of suspending duty free vehicle permits for MPs for one year in a context where all MPs have already purchased their duty free vehicles, the Governor said the policy had to be imposed in common to public officials, professionals and politicians. “What would have been your reactions, if we excluded politicians from the category? I don’t have the data as to how many MPs have utilized the permit, but we did not want to specifically leave them out,” he replied.
Senior Deputy Governor Dr. Nandalal Weerasinghe said USD 467 million of foreign exchange had gone out from Government Securities this year. He said last year there was an addition of USD 440 million of foreign investment to the Government Securities.
Sri Lanka Government secured USD 1 Billion Foreign Currency Term Financing Facility, the Central Bank announced.
Proposals from international and domestic banks and investment houses have been entertained for a Foreign Currency Term Financing Facility (FCTFF) denominated in United State Dollar (USD) or Japanese Yen (JPY) or Euro or of their combination up to a limit of USD 1,000 million in March 2018.
Accordingly, four proposals were received from international and domestic banks and investment houses, the Central Bank said.
Through a strict evaluation and negotiation process by a Cabinet appointed Steering Committee and Technical Evaluation Committee, the China Development Bank (CDB) was selected as the syndicate arranger based on least cost and longer maturity period given in its proposal submitted.
Consequently, the Government of Sri Lanka secured USD 1,000 million from CDB under the FCTFF with a maturity period of eight years.
The interest cost is highly competitive and linked to 6 Month USD LIBOR with a grace period of three years. The repayment will be in equal semi-annual payments after the grace period. The resulting inflow increases the official foreign reserves by USD 1,000 million.
The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on Monday, decided to maintain policy interest rates at their current levels.
Accordingly, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank will remain at 7.25 per cent and 8.50 per cent, respectively.
The Board arrived at the above decision after carefully considering current and expected developments in the domestic and global economy, with the aim of stabilising inflation at midsingle digit levels in the medium term to support growth. Tight monetary policy conditions are observed globally with a continuous strengthening of the US dollar.
The broad based strengthening of the US dollar subsequent to the increase in policy interest rates by the Federal Reserve and expectations of further interest rate hikes have exerted pressure on emerging market economies (EMEs).
In response, EMEs with significant pressure on local currencies have tightened their monetary policy stance by raising policy interest rates. Meanwhile, the recent upward trend observed in international oil prices is likely to exacerbate challenges faced by the global economy.
The Central Bank has taken several measures to strengthen transparency and accountability in several areas of its operations in line with the recommendations of the Presidential Commission of Inquiry to Investigate, Inquire and Report on the Issuance of Treasury Bonds (COI).
Amendments are being formulated with respect to the Monetary Law Act and the Registered Stocks and Securities Ordinance.
Operations relating to the issuance of government securities were strengthened by introducing a new auction system for treasury bonds.A similar system is being formulated for treasury bills as well. Pre-bid meetings are held regularly, the auction calendar is announced in advance and a policy of accepting no more than the total offered amount has been adopted.
Internal controls in relation to the issuance process have been strengthened and the operational manual has also been updated.The fund management function of the Employees’ Provident Fund was strengthened by a new robust Investment Policy Statement, an Investment and Trading Guideline, and an updated operational manual, which are now in place with enhanced internal controls to mitigate risks and improve transparency and accountability.
The legal function is being strengthened with measures to increase resources and the internal audit function has improved its coverage and depth in terms of related risk exposures.
Furthermore, CBSL has introduced a whistle-blowing policy and a code of conduct for all employees.The procurement process for several forensic audits is already underway in several areas such as investments of a fund in equities and treasury bonds, issuance of treasury bonds and certain operations of selected entities regulated and supervised by Central Bank.
The forensic audits are to be conducted by entities with a global practice. Several internal disciplinary proceedings are also underway.
Civil recovery action has been filed to recover unlawful gains made by a Primary Dealer at the expense of funds of the Central Bank and the Employees’ Provident Fund (EPF).
Law enforcement authorities have already initiated action after a complaint was lodge by the Central Bank.
Sri Lanka government revenue declined as a percentage of estimated GDP to 6.4 percent from 6.7 percent recorded in the corresponding period of 2017 Finance, Ministry report revealed. In nominal terms, total revenue increased by 5.1 per cent to Rs. 920.8 billion during this period under consideration from Rs. 876.3 billion recorded in the corresponding period of 2017.
During the first half of 2018 total expenditure and net lending declined to 8.8 percent of estimated GDP from 9.3 per cent recorded in the corresponding period of 2017. Recurrent expenditure declined to 6.9 percent of estimated GDP during the same period under consideration from 7.1 per cent in the corresponding period of 2017.
Capital expenditure and net lending declined to 1.9 percent of estimated GDP from 2.2 per cent recorded in the same period of 2017.As a per percentage t of estimated GDP, the overall budget deficit declined to 2.4 per cent (Rs. 345.8 billion) in the first half of 2018 from 2.6 per cent (Rs. 332.6 billion) recorded in the corresponding period of the previous year, the Finance Ministry disclosed.
The primary account, as a percent of estimated GDP, improved to 0.3 per cent from 0.1 per cent in the corresponding period of 2017. During the first half of 2018 net domestic financing declined to Rs. 184.9 billion compared to Rs. 269.5 billion in the corresponding period of 2017, whereas net foreign financing (NFF) increased to Rs. 161.0 billion during the period under review in comparison to Rs. 63.1 billion recorded in the same period of 2017
Sri Lanka’s Export Development Board (EDB) has drawn up a new entry strategy for the Chinese market to pre-identify products using an international consultancy firm/consultant, as most of Sri Lanka’s SMEs and ministries fail to complete export orders to China.
The EDB is compelled to seek the consultancy assistance following the failure of local authorities to fulfill Chinese requirements of a massive banana export order. Sri Lanka makes another attempt to export bananas China signing fresh agreement with the Chinese government following the failure to supply even a single kilo of bananas to that country under the 2016 agreement.
The Agriculture Ministry will sign an agreement with the Chinese Government to supply banana to the Chinese market, Agriculture Minister Mahinda Amaraweera said. The Ministry will export high quality Ambul kesel (sour plantains), Rath kesel (red banana) and Kolikuttu to China under the new agreement.
Agriculture Ministry in 2016 signed an agreement with China to export more than 10,000 tons of bananas.According to the 2016 agreement, the Ministry was to send a list of 150 banana cultivators to the Chinese government and it had failed to prepare a list as of yet.
The Chinese government had previously made an order to purchase the Ambun, Ambul and Kolikuttu varieties from Sri Lanka.
The Ministry could not supply the varieties demanded by China and officials were still studying the matter.The Chinese Authorities have agreed to provide market opportunities for Papaw, Pineapple, Mango and Rambutan as well.
Chairman of National Agency for Public Private Partnership (NAPPP) Thilan Wijesinghe said yesterday (28), that the NAPPP is looking at public-private partnerships in order to make state-owned entities viable in the country.
Wijesinghe cited the Kandy Mahaiyawa urban housing project, Pettah multimodel hub, Ekala aero city project, convention centre port city, medical complex port city, school at port city, Dedduwa integrated tourism development project, Colombo port cruise terminal, renewable energy park in Pooneryn and a barge mounted power plant as some of the PPP projects in the pipeline. He made these remarks while addressing the 31st Annual Conference of OPA on the theme of ‘Innovative Digitalization’, held at Cinnamon Lakeside Hotel yesterday.
Talking about technological aspects, Wijesinghe said the delay in implementing the Transit Smart Card Project in Sri Lanka is a major concern.
“Transit Smart Card project has been gravitating among Information and Communication Technology Agency of Sri Lanka (ICTA) ICTA, Central Bank of Sri Lanka, Ministry of Transport and various other line ministries over the last two and a half years.”
“However, we have thrown our hat into the ring and taken some control of it. What we have today is a brilliant technical solution. But it is sad that there is no idea how this project can be implemented from a financial model perspective,” he said. He also revealed that the NAPPP or any other line ministries currently don’t have a single, tangible , large scale digital infrastructure project that’s under the implementation stage.
He said the government should be essential partners in shaping the transition to new scientific, technological, economic and social framework.
“Subsequently, NAPPP would be able to play a catalytic role in facilitating PPPs in digital infrastructure and act as a leading partner for generating economic productivity,” he said.
Wijesinghe also underscored Sri Lanka's successful track record with regard to the implementation of PPPs with no failed transactions.
“Also, the government must not over- estimate what it can do,” he said, adding that Sri Lanka has financially closed over USD 5 billion worth of PPP projects in the last 20 years.
“If you go back to the 1996-2000 era when I was the Board of Investment (BOI) Chairman, that was the time when Sri Lanka embarked on the PPP journey and financially closed almost a USD1 billion worth of PPP projects over a five-year period,” he said.
Sri Lanka is gearing up to face the massive debt burden now at a critical stage as the bunching effect of loans will come into play in 2019.
Sri Lanka’s government revenue as a share of GDP is lower than many peers, while the government debt-to-GDP ratio is much higher, international rating agencies warned.
Debt-to-GDP ratio in Ethiopia, Uganda and Ghana among other countries is lower than Sri Lanka even though the revenue-to-GDP ratio in these countries higher than Sri Lanka, they claimed.
However, Central Bank Governor Indrajit Coomaraswamy noted that Sri Lank is a middle-income country striving to transition to an upper middle-income country and therefore its debt-to-GDP ratio cannot be compared with countries like Ethiopia, Uganda and Ghana.
A sum of Rs.2, 057 billion has been allocated for debt servicing in 2019. This is the largest amount of money a government in the history of this country is compelled to bear in repaying its borrowings.
Out of this amount, Rs.1, 271 should be paid locally next year while Rs.786 billion, which is equal to 4,650 million US dollars should be paid to foreign lenders.
Accordingly, the Government expects to borrow Rs.1, 944 billion from local and foreign sources for its debt servicing including the financing of the budget deficit in 2019.
In the wake of rupee depreciation to a new high, Sri Lanka’s commercial banks have been restricted of excessive foreign currency borrowings and maintaining foreign exchange reserves with the aim of preventing unwarranted macroeconomic and financial stability concerns.
The rupee closed at 168.50 ton Monday (24), after falling to an all-time low of 169.00 per dollar week.
The Monetary Board of the Central Bank has introduced a policy framework for foreign currency borrowings of licensed banks, reliable official sources said.
The objective is to address the high dependence on foreign currency borrowings and the resulting exposure of licensed banks to foreign exchange risk.
This action is also aimed at minimizing the pressure on the reserves and exchange rate of the country arising from large borrowings in foreign currency.
The Sri Lankan rupee is depreciating rapidly but it has been maintained at a stable level following intervention by the central bank, market sources said.
The Central sank has intervened to curb excess volatility in the exchange rate, sources said.
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