CB to ensure external sector stability | Page 2 | Sunday Observer
Six-month Road Map

CB to ensure external sector stability

10 October, 2021

The Central Bank will take immediate steps to ensure stability of the external sector by closely focusing on the near-term horizon in the next six months, said Central Bank Governor Ajith Nivard Cabraal.

He said this while unveiling ‘The Six-Month Road Map’ last week to ensure macroeconomic and financial system stability.

The rationale for the short-term focus is that, given the forex challenge and debt service concerns, the proper management of this period will result in clarity and certainty being restored which will enable the economy to rebound.

The current efforts to enhance merchandise and services exports inflows will also show significant achievements, while a normalisation in tourism cash flows is also likely by the end of that six-month horizon, Cabraal said.

On foreign direct investments he said the FDI pipeline is expected to increase with the Port City and industrial zones taking off shortly.

Such outcomes will provide a stable foundation for the external sector by the end of the targeted six months, the Governor said. 

However, he said the new effort will need coordinated efforts of all stakeholders of the external sector, with vital, but moderate contributions by each stakeholder. 

Policy guidance by the Government and the Central Bank will help the required adjustments to take place gradually during the period of transformation of the economy to greater stability, Cabraal said, adding that the efforts will also prompt positive actions of international investors and international rating agencies. 

Actions of global central banks will also influence the way forward, the governor said.

Elaborating the key  outcomes expected from major stakeholders, Cabraal said a business-friendly budget; improved non-debt inflows; and active support to raise funds to change the debt-mix is crucial to boost economic growth.

The Central Bank will  ensure macroeconomic and financial system stability as demanded in the Monetary Law Act; ensure stable exchange rate and am interest rate structure, he said

Greater transparency in domestic foreign exchange transactions; new funds and credit lines from abroad; close co-operation with the Central Bank to ensure export proceeds

conversion is expected from the banking sector, the governor said adding that avoidance of adverse speculation on exchange rate, and remit and convert export proceeds on time; growth in export businesses  is expected from merchandise and service exporters while importers should curtail non-essential and non-urgent imports.

“We expect avoidance of hoarding essential imported and local goods; avoid attempting to earn supra-normal profits by raising margins and charging exorbitant prices from retailers and wholesalers and an increase in remittances and non-debt creating inflows from the global community,” he said.

Cabraal said a single sector would not be overly

burdened, but  all will need to contribute to revive the economy. 

Meanwhile the Central Bank expects the  economy to record a GDP growth rate of 6.5 percent by the first quarter of 2022 and beyond that by the end of next year.

 The Central Bank expects stability in the exchange rate, foreign reserves to meet over four  months imports, a stronger Central Bank balance sheet and a higher GDP growth by March next year. The regulator is confident the economy will record five percent growth this year and over six percent in 2022 supported by a strong framework to ensure macro economic and financial system stability.

An ‘Outcome Oriented’ Central Bank will intervene in the forex market by providing the funds to finance the country’s energy bills, and thereby infuse liquidity, promote investments in Rupee denominated government securities with a guarantee on the exchange rate, strengthen mandatory conversion of export proceeds, request the Government to tax profits of exporters at 28% and not 14% where forex is not repatriated and converted, expand the moratorium while also providing liquidity support to affected finance companies, stop parate executions and repossession of vehicles in the next six months for pandemic-affected borrowers, share the burden of Pandemic losses suffered by local SMEs by allocating Rs. 15,000 million towards interest accrued through a mechanism which is to be worked out, use monetary policy tools to unwind monetary stimulus extended during the pandemic, use macroprudential tools and microprudential regulation and supervision to guide the financial sector towards sustained stability, facilitate education and health related forex outflows immediately, lift the ceiling imposed on outward investment and migration allowances in January  and discontinue cash margin deposit requirements on “nonessential and non-urgent imports” with immediate effect.

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