Measures in place to deal with GSP+ withdrawal - Cabraal | Sunday Observer
Coordinated efforts to boost external sector

Measures in place to deal with GSP+ withdrawal - Cabraal

17 October, 2021

The Central Bank projects a strong economic growth rate following an early recovery of key sectors such as tourism and exports next year.

The bank is optimistic that it will tide over debt repayments coming up in the nears a head comfortably and put the country on a growth path again.

“The Government and the Central Bank will use the strategies laid out in the six-month road map to help boost economic growth,” said Central Bank Governor Ajith Nivard Cabraal in his post Monetary Policy stance remarks.

The dollar need in the country will be solved with directions for transmission in the banking sector and when policy rates take effect.

“We see a major surge in imports which factors into the trade deficit gap, an indication there is no issue for foreign currency in the market,” he said.

The bank is also optimistic that worker remittances would pick up with a re-bounce of the global economy next year.

Responding to a possible withdrawal of the GSP+ facility, Cabraal said policy measures will be taken to deal with in the event of a reversal of the trade concessions.

The continuation of the trade facility beyond 2023 would depend on Sri Lanka’s commitment to the adherence of international conventions.

The planned coordinated efforts by the Government and the Central Bank are expected to strengthen the external sector in the period ahead. Earnings from exports marked a notable improvement and recorded over US dollars 1 billion for the third consecutive month in August.

Expenditure on imports has also increased, partly reflecting the surge in global commodity prices, resulting in an expansion in the trade deficit during the eight months ending August 2021, over the corresponding period of last year.

However, the sharp rise in freight rates and supply chain crisis are to hit exports across the globe.

Available indicators and projections suggest that the real economy would grow by around 5 percent in 2021, and gradually traverse to a high and sustained growth trajectory over the medium term, following near-term stabilisation measures that are being put in place by the Government and the Central Bank.

Outlook for tourism improved with the easing of travel restrictions globally and the successful vaccination drive domestically. Despite the moderation of workers’ remittances observed in recent months, a rebound is expected in the period ahead with the improved growth outlook for major foreign employment source countries and greater stability in the domestic foreign exchange market.

The realisation of foreign investments in the real sector and the timely adoption of remedial measures by the Central Bank as enunciated in ‘The Six-month Road Map for Ensuring Macroeconomic and Financial System Stability’ are gradually easing pressures in the domestic foreign exchange market.

The depreciation of the Sri Lankan rupee against the US dollar is recorded at 6.8 percent thus far in 2021.

The Sri Lankan rupee remains largely undervalued as reflected by the real effective exchange rate (REER) indices.

In the meantime, gross official reserves were estimated at US dollars 2.6 billion by end September 2021. This, however, does not include the bilateral currency swap facility with the People’s Bank of China (PBoC) of CNY 10 billion (equivalent to approximately US dollars 1.5 billion)

Gross official reserves are expected to improve with the measures that are being pursued by the Government and the Central Bank to attract fresh foreign exchange inflows, as outlined in the Six-month Road Map, thereby reinforcing the stability of the external sector in the period ahead.

However, Sri Lanka will have to grapple with the huge repayment of outstanding debt amounting to around Rs. 15 trillion, which amounts to a debt to GDP of around 101 percent.

A silver lining amid the gloom and doom speculation is the global economic recovery expected to continue despite large disparities across countries.

As per the World Economic Outlook (WEO) of the International Monetary Fund (IMF) released on October 12, 2021, the global economy is projected to grow by 5.9 percent in 2021 and 4.9 percent in 2022. As per the estimates of the Department of Census and Statistics (DCS), the economy witnessed a strong recovery during the second quarter of 2021, recording a real growth of 12.3 percent, year-on-year, following the growth of 4.3 percent, year-on-year, in the first quarter of this year.

With the gradual return to normalcy after phasing out the Covid-19 related lockdown measures, alongside the successful rolling out of the Covid-19 vaccination program and growth supportive policy measures, the momentum of economic activity is expected to sustain in the period ahead.

The Central Bank decided to maintain the Standing Deposit Facility Rate and the Standing Lending Facility Rate of the Central Bank at their current levels of 5.00 percent and 6.00 percent considering the macroeconomic conditions and expected developments on the domestic and global fronts.