Vital to increase foreign reserves, says NEC chief | Sunday Observer

Vital to increase foreign reserves, says NEC chief

Foreign exchange reserves need to be increased urgently to stabilise the currency and this could be done by increasing interest rates for Non Resident Foreign Currency (NRFC) accounts and incentivising foreign remittances, Secretary General and Chief Economist of the National Economic Council (NEC), Prof. Lalith Samarakoon told journalists at a media briefing in Colombo on Thursday.

He said increasing gross foreign reserves should take precedence over other issues and even the devaluation of the Rupee which is a result of the fast recovery of the US economy since 2016.

“I rang the alarm bells about the US interest rates rise from 2015. However, no heed was paid to it and today we have a stronger Dollar and a growing economy in the US,” Prof. Samarakoon said.

According to recent forecasts, the US economy will rise 3.1 percent this year, 2.5 percent in 2019 and 2.0 percent in 2020. Unemployment rate will decline to 3.7 percent in 2018 and 3.5 percent in 2019.

“I don’t think that increasing government revenue as a fiscal measure will be a solution to the current situation in the economy as many think. Increasing foreign reserves by attracting foreign direct investments and driving exports is a key factor to bring in stability to the currency.

However, fiscal discipline is crucial to rationalise government expenditure,” Prof. Samarakoon said.

The government aims at attracting US$ 2.5 billion foreign direct investments this year.

Responding to the low level of business confidence to boost foreign direct investments he said the appreciation of the US Dollar resulting in outflow of foreign currency is the main factor but domestic economic conditions to have a role to play in enticing foreign investors.

“The other major factor that needs attention is the twin deficits emanating from the Current Account and the budget that stalls economic growth. The Budget deficit in 2017 was 5.5 percent and this year its 5.3 percent which is a major challenge for the country. The Current Account which was 2.6 percent last year has already grown to 2.9 percent this year,” Prof. Samarakoon said.

Speaking further on the outcome of the NEC meeting with the business community held on Tuesday, Prof. Samarakoon said the business community wanted clear, coherent and consistent long term policies to sustain and develop the business sector in the country.

The wide stakeholder meeting attended by university dons, economists, financial experts, chamber heads and private sector representatives called for a one voice in policy making and implementation. Representatives said fickle and vague in tax policies are major hindrances to promote foreign investors and create a stable businesses environment in the country.

The business community said investors have lost faith in the economy and are not willing to take risks as a result. Building business confidence is pivotal to position the country for trade and investment.

It was also highlighted that increasing high tech and value added exports and minimising imports is vital to address the currency depreciation as a short term measure.

The attendees also stressed that free trade agreements need to be fully used for the benefit of the country. It was also noted that the recent import restriction policies do not go well with import dependent industries as over 70 percent of imports to Sri Lanka are consumer goods.

Business community representatives also said that circulation of black market money is on a steady rise and that strict enforcement of law was essential to create a fair and orderly market.

It was also said that while trade liberalisation was good for the country, its impact on local industries should be taken into account with proper policy measures.

“NEC will collaborate with the Central Bank and the Finance Ministry to come up with short, medium and long term measures to address the exchange rate crisis in the country. NEC will propose measures to monitor export income coming to the country as a short term measure,” Prof. Samarakoon said while adding that measures should be taken to control the outflow of foreign exchange as a temporary move.

The Central Bank has pumped in US$ 184 million up to October 2 as a measure to stabilise the currency.

The Government and the Central Bank imposed import restriction by increasing the cash margin by 100 percent for vehicles and reduction in Loan to Value ratio from 70 to 50 percent.