Identifies debt and forex, financial sector and macroeconomic stability concerns as critical issues to be addressed in short to medium term
Says all these will need some clear policy responses from Govt. and CBSL
Unveils raft of bold, progressive and controversial measures
Lays onus of recovery and action by all stakeholders; comes up with ‘To-Do list’
Reveals forecast of $ 7 b in non-debt foreign inflows between October-December this year and $ 11 b in 1Q of next year
Separately fresh forex inflows and roll-overs expected from Govt. and Central Bank forecast at $ 5 b last quarter of 2021 and $ 6 b in 1Q of 2022
Governor Nivard Cabraal reiterates homegrown solution will take country to growth path
The Central Bank yesterday announced a raft of bold and progressive as well as a few controversial measures to immediately stabilise the foreign exchange and financial system, thereby giving a fillip to the COVID pandemic-impacted economy in the short-term.
The policy prescription including new directives as well as requests to the Government was revealed via the Central Bank’s six-month Road Map for ensuring macroeconomic and financial system stability.
“The new measures will bring in greater stability to the economy with stable prices and sound macroeconomic fundamentals that will lead to a stronger and a disciplined economy,” Central Bank Governor Nivard Cabraal said yesterday after unveiling the Road Map, which was his brainchild when he served in the same capacity between 2006 and 2015.
He described the Road Map unveiled as the “first step” in a long journey and given the COVID pandemic-caused challenges, there was a need for multiple interventions with burden or the responsibility to be shared by all stakeholders. “In times of stress, we need discipline rather than rocking the boat. If not we all will capsize. Therefore all stakeholders need to understand their role and responsibility,” Cabraal said.
Reflecting reliance on home-grown solutions, Cabraal’s short-term Road Map contained measures for the short-term (six months) ensuring immediate stability; another set for one year to consolidate and medium- to long-term initiatives to build cushions to absorb any future shocks.
The CBSL Chief acknowledged that there was fear about the present economic challenges following the pandemic and resultant impacts. “Weakening of the economy, along with the effect of the COVID-19 Pandemic has recently caused anxiety about the macroeconomic stability and the sustainability of the Sri Lankan economy,” Cabraal added.
In that context, he also said several key issues around Government debt would need some clear policy responses whilst the Central Bank on its part had also faced challenges in delivering its stability objectives owing to the prevailing difficult economic conditions. Given the pandemic, Cabraal also said people had faced challenges due to the pandemic, although several Governmental policy responses had been helpful.
In that context, the CBSL Governor listed the priorities in the short-term were focused efforts on macroeconomic and financial system stability that includes near-term measures to ensure continued and timely debt servicing, increasing forex liquidity in the market and creating a framework for all enterprises to recover from the pandemic-effect.
Next year, the CBSL Road Map to be unveiled in January will aim at improving the external debt profile while concentrating on non-debt inflows, deliver the fiscal and external targets, promote a fast recovery in the real economy and improve Sovereign ratings and Ease of Doing Business.
Cabraal said the medium- to long-term goal was to build stable “cushions” in all macro-fundamentals to absorb any shock, strengthen the domestic production economy, strive for higher growth within a low inflation environment, and ensure the achievement of fiscal and monetary targets.
To realise the objectives of the short-term Road Map, the CBSL Governor came up with a ‘To-Do list’ which requires contribution by all stakeholders including the Government, the Central Bank, the banking/non-bank sector, merchandise exporters, services exporters, importers, industrialists/property developers, borrowers/savers, foreign exchange houses, those remitting their earnings, and share market/corporate debt market participants.
Cabraal said a single sector would not be overly burdened, but all would need to contribute. “This new effort will require coordinated efforts of all stakeholders of the external sector, with vital, but moderate contributions by each stakeholder,” he stressed.
The CBSL Chief said policy guidance by the Government and the Central Bank would help the required adjustments to take place gradually during the period of transformation of the economy to greater stability and these efforts would also prompt positive actions of international investors and international rating agencies. “Actions of global central banks will also influence the way forward,” he added.
He listed the key set of outcomes expected from major stakeholders. They were as follows:
Government: A business-friendly Budget; improved non-debt inflows; active support to raise funds in order to change the debt mix.
Central Bank: Macroeconomic and financial system stability as demanded in the Monetary Law Act; ensure stable exchange rate and interest rate structure.
Banking sector: Greater transparency in domestic foreign exchange transactions; new funds and credit lines from abroad; close cooperation with the Central Bank to ensure export proceeds conversion
Merchandise and service exporters: Avoidance of adverse speculation on exchange rate, and remit and convert export proceeds on time; growth in export businesses.
Importers: Curtail non-essential and non-urgent imports.
Retailers and wholesalers: Avoidance of hoarding essential imported and local goods; avoid attempting to earn supra-normal profits by raising margins and charging exorbitant prices.
Global Sri Lankans: Increase remittances and non-debt creating inflows.
As per the Road Map, Sri Lanka is estimated to get nearly $ 7 billion in foreign inflows between October and December and $ 11 billion between January and March next year.
These inflows include export earnings, workers remittances, tourism, new credit lines and forex deposits to the banking sector, net foreign inflow to the Colombo Stock Exchange and the Colombo Port City. Separately $ 5.1 billion of fresh forex inflows and roll-overs were expected from the Government and Central Bank in October-December and another $ 6 billion between January and March next year.
“The Central Bank will take immediate steps to ensure stability of the external sector by closely focusing on the near-term horizon, i.e., the next six-month period,” Cabraal said.
He said the rationale for this short-term focus was that, given the forex challenge and debt service concerns, the proper management of the current period would result in clarity and certainty being restored which would enable the economy to rebound.
By the end of that six-month horizon, the current efforts to enhance merchandise and services exports inflows will also show significant achievements, while a normalisation in tourism cashflows is also likely
The FDI pipeline is expected to increase with the Port City and industrial zones taking off. “Such outcomes will provide a stable foundation for the external sector by the end of the targeted six months,” Cabraal added.
He also said with the success of the vaccination rollout, gradual opening up of the country under strict adherence to health guidelines was expected to help all sectors to return to normalcy gradually.
“The recovery will be widespread and will include vulnerable groups such as the SME sector, informal businesses and daily wage earners who will effectively engage in economic activities, leading the economy to recover faster in the forthcoming period,” said Cabraal.
It was noted that the investment climate would gradually improve with the implementation of the new legislation applicable to capital markets and more direct investments were expected with the implementation of the Port City Economic Commission Act and proposed monetisation of underutilised assets.
“Once the tourism industry starts to pick up, the pressure in the external sector will gradually normalise and greater stability in the exchange rate and improvements in the current account balance and forex reserves are envisaged,” the CBSL Chief added.
He said that having tackled the near-term obstacles, Sri Lanka would be able to progress with greater confidence towards 2022 and beyond.
According to the CBSL Governor, by end 2022, the following further positive outcomes are envisaged:
Normalcy in economic activity with the COVID-19 pandemic being under control, resulting in a real GDP growth of around 6%
Inflation to stabilise in the middle of the desired 4-6% target range
Interest rates to stabilise further
Revival of tourism to lead to a better business sentiment
Higher investment flows
Improved macroeconomic fundamentals, resulting in improved Sovereign ratings
Stronger and disciplined economy
“This is a dynamic plan and we will tweak it, fine-tune it, or even change some parts, as we move on,” Cabraal added.
Earlier on in his Road Map presentation, the CBSL Chief acknowledged there were multiple concerns, whilst noting regular doomsday reports by the Opposition and other interest groups had also contributed to the negative sentiment.
Among concerns were severe COVID-19 lockdown impact, sluggish growth and struggling businesses, shortage of foreign exchange and fears about a sharp depreciation of the rupee, concerns about debt sustainability, particularly with the large outstanding values of ISBs, weakened revenues, unfavourable sovereign ratings, SMEs facing serious challenges, possible increase in non-performing loans, increase in the Central Bank’s Treasury bill holdings (money printing), and stockpiling of imported goods by importers.
He said that the reality had been that the economy had shown little positive progress over the past few years and pointed to the fact that the economy was at $ 80 billion in 2020 as against $ 79 billion in 2014.
(FT)