Economy poised for faster recovery next year - Cabraal | Sunday Observer

Economy poised for faster recovery next year - Cabraal

28 November, 2021

Central Bank Governor Ajith Nivard Cabraal said the economy will notch around six percent growth next year following a re-bounce in the tourism sector boosting foreign exchange inflows to the country.

At the media briefing on the monetary policy stance last week, Cabraal said there is no need to seek a bailout from the IMF if debt restructuring is done scientifically. The former regime had opted for a program with the global lender as the value of International Sovereign Bonds (ISBs) had shot up from around US$ 6.9 billion in 2010 to around US$ 18 billion by end 2019, Cabraal said. The IMF will want us to depreciate the rupee, reduce the number of public servants, cut pensions, sell state lands and slash subsidies if we seek its assistance, he said. Citing Sri Lanka Tourism projections, Cabraal said a 10 percent growth in arrivals is expected each month next year which would be a major boost for the industry and the economy.

The industry notched 29,000 visitors during the first three weeks this month and around 89,000 up to November this year. Banking on foreign remittances of expat workers Cabraal said around 230,000 Lankans go overseas for employment each year and added that the numbers would pick up with the easing of travel restrictions and normality being restored across countries.

“We have encouraged remitting through proper channels by granting incentives such as Rs. 2 per every USD converted to Rupees,” Cabraal said, adding that exporters who had reservations on the conversion of export proceeds to rupees have understood the rationale behind the rule.

Allaying fears of debt defaults, Cabraal said allocations for repayment of external loans had already been made and added that negotiations are in progress with central banks and governments for swap arrangements. Foreign reserves which had dropped to US$ 2 billion in September are expected to rise to USD 3.5 billion at the end of the year according to the Central Bank.

However, economists and think tanks have cautioned law makers on the need to consolidate the reserve base given the quantum of loan repayments coming up in the next four years.

The economy witnessed a strong recovery during the first half of this year, supported by fiscal and monetary stimulus measures, the Central Bank stated.

The re-emergence of the pandemic and the resultant disturbances to production appear to have affected the ongoing recovery somewhat during the third quarter of this year.

However, the available high frequency indicators suggest that economic activity is fast returning to normalcy.

The removal of Covid related lockdown measures in October and the successful nationwide vaccine rollout would help activity in the period ahead.

While real GDP growth is projected at around 5 percent this year the ongoing rise in Covid infections globally and domestically could impact this expectation to some extent.

The external sector remains resilient against strong headwinds with earnings from merchandise exports remaining robust, recording over US dollars 1 billion for the fourth consecutive month in September 2021.

Preliminary data show that merchandise exports have recorded an all time high in October 2021.

Expenditure on imports also increased, widening the trade deficit during the nine months ending September 2021 over the corresponding period of the previous year. The tourism sector has displayed strong signs of revival with the easing of restrictions.

Despite subdued inflows on account of workers’ remittances in recent months, a rebound is expected in the period ahead with the continuous rise in worker migration and efforts taken to facilitate remittance flows through formal channels. The depreciation of the Sri Lanka rupee against the US dollar is recorded at 7.2 percent thus far in 2021.

The exchange rate has remained stable at around Rs.200-203 levels against the US dollar during the past three months. Meanwhile, gross official reserves were estimated at US dollars 2.3 billion by end October 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).

Measures taken by the Government and the Central Bank to attract fresh forex inflows, and the anticipated inflows to the private sector, including the financial sector, are expected to augment gross official reserves, thereby strengthening the external sector in the period ahead.

Specifically, a greater conversion of export proceeds is observed, while negotiations with the foreign counterparts of the Government and the Central Bank are progressing, broadly in line with the path envisaged in the Six-Month Road Map. Market interest rates have increased, reflecting the passthrough of tight monetary conditions In response to the tight monetary and liquidity conditions, most market lending rates have adjusted upwards.

The Monetary Board of the Central Bank decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 5 percent and 6 percent considering the macroeconomic conditions and expected developments on the domestic and global fronts.

Yields on government securities, which increased notably, have stabilised with enhanced subscriptions at primary auctions, reflecting improved market sentiments.

Meanwhile, credit extended to the private sector, which expanded notably underpinned by eased monetary conditions, slowed somewhat in September 2021. However, data for the nine months ending September 2021 indicate that credit flows, particularly to the industry and services sectors of the economy, have improved significantly, thereby supporting the revival of the economy.

In the meantime, credit obtained by the public sector from the banking system, particularly net credit to the Government, continued to expand. Inflation accelerated recently mainly due to supply side disturbances and the surge in commodity prices internationally.