Economy: Basic fundamentals in good shape, says CB Governor | Sunday Observer

Economy: Basic fundamentals in good shape, says CB Governor

The basic fundamentals of the economy is in pretty good shape despite the domestic and external headwinds to the economy, Central Bank (CB) Governor Dr. Indrajit Coomaraswamy told a forum on ‘Sri Lanka Forward’ organised by the Chartered Institute of Management Accountants (CIMA) last week.

He said the International Monetary Fund (IMF) completing the fifth review of its program with Sri Lanka is a good endorsement of Sri Lanka. It is clear indication that the fundamentals of the economy is reasonably in good shape. The IMF also indicated that it is confident Sri Lanka is not facing debt refinancing risks and that it could meet its debt obligations.

“We have completed 65 percent of our external debt obligations. A syndicated loan to the tune of US$ 330 million and two international Sovereign Bonds were paid. There have been concerns whether Sri Lanka can meet its debt obligations. We have never failed in meeting our debt obligations and we will meet in the future as well.

“The Japan Bank for International Cooperation (JABIC) and the People’s Bank of China have offered guarantees to us to raise Sakura and a Panda Bonds. The World Bank has also offered a policy based guarantee enabling us to borrow up to US$ 1 billion on its AAA ratings. It has agreed to cluster the reforms done by Sri Lanka.

The governor was upbeat that Sri Lanka can access financial markets with backup swaps from countries, including India, China and Qatar to the value of US$ 3.1 billion.

He was also confident the current account deficit will come down from 3.2 percent last year to less than three percent to around 2.7 or 2.8 percent this year.

“However, there is a lot of homework to be done with regard to structural reforms and fiscal management to achieve the growth targets,” the governor said, adding that there will be a lot of pressure on the fiscal side created by the need to improve security and compensation payments to be made.

He said incremental expenditure needs to be minimised. Expenditure should be shifted around to accommodate priorities. The new Inland Revenue Act which is being worked out will help improve revenue generation.

“Growth will be lower this year. It will certainly be below three percent with tourism, a key sector of the economy having taken a hit from the recent attacks and its chain effects on sectors linked to the tourism industry. But we need to work on fundamentals. Stability of the economy is reasonably in good shape. We have offered a financial package for tourism with VAT relief and moratoriums for loans,” Dr. Coomaraswamy said.

The Central Bank’s initial growth forecast for 2019 was 4.2 percent. However, following the recent terrorist attacks, economic growth projections for the year have been revised downwards by the Central Bank.

The IMF maintains its growth projection of 3.5 percent for Sri Lanka this year and thereafter, five percent in the medium term.

“Economic growth rate dropped to 3.2 percent last year from 3.4 percent in the previous year. This is a clear indication of an output gap mainly due to the contraction in the construction sector by around 2.1 percent,” the Governor said stressing the importance of improving growth in key sectors to spur economic growth.

“The external debt dynamics are very challenging. The question is do we have adequate foreign reserves. Currently reserves are at US$ 7.5 billion and pre Easter Sunday attacks projections for the year being at US$ 8.2 billion predicated us to borrow US$ 2 billion from foreign markets. Earnings from the tourism industry is expected to come down from the projected earnings of US$ 5 billion this year. The low earnings will be triggered by the sharp drop in the number of tourist arrivals in the coming months.

“The tourism sector is clearly to take a hit. People’s income will be affected and aggregate demand will also be affected. However, a large swath of the economy, such as agriculture and manufacturing has been untouched and this is enough to bounce back. We need to be confident the security forces are doing a good job.

There is goodwill from all sides. But we need to maintain discipline. It is a manageable proposition,” the governor said.