June 09, 2017 (LBO) – Sri Lanka has been living beyond its means, with recurrent expenditure higher than revenue, Governor of Central Bank Indrajit Coomaraswamy said, speaking at the Sovereign and Banking Forum hosted by Fitch Ratings.
“Due to concessional loans from World Bank and Asian Development Bank, with a grace period of 10 years, and maturity of 20-30 years, we were able to get away with it. Since 2010 Sri Lanka moved to a middle-income country and was exposed to ratings agencies and international capital markets,” he said.
Coomaraswamy emphasized three macro-economic fundamentals that will enable sustained growth.
The Fiscal framework envisages budget deficit dropping to 3.5% of GDP — challenges to be addressed are the issues of quality and composition of expenditure. The Monetary framework aims to have a flexible inflationary targeting regime, moving from a monetary aggregate, with assistance from IMF.
The exchange rate framework will manage exchange rates to gradually bring down the REER to 100.
Referring to the governor’s macro-economic fundamentals, Anushka Wijesinha, chief economist at the Ceylon Chamber of Commerce, stated that fiscal consolidation efforts are welcome. Non-tradable sectors such as finance and construction are performing well, but the tradable sectors have been lacking, though we are likely to see a pick up in 2018/2019 with GSP+.
Commenting on government performance, he said non-tax revenue increased by 124% amounting to 50% of the increase in total revenue. There was a three-fold increase in profit and dividend transfers of SOBE’s mainly banks, insurance, CEB and CPC, though the trend is unlikely to continue in 2017.
The Ceylon Electricity Board generated one-third of power through hydro power which was the same as the previous year, and the balance was generated via thermal power, which incurs high costs hence huge losses.
Discussing the flexible regime on exchange rates, Wijesinha went on to state that with GSP+ strengthening inflows and the much delayed Hambanthota PPP deal with China coming through, we can look forward to larger inflows. Wijesinha does not expect interest rates to be tightened again during the year.
“Tradable sectors are looking to expand, further tightening of policy will affect them,” he said.
No major bond issues are expected from August onwards, and in the interim period, the Central Bank will raise money to act as buffer.
Sri Lanka’s Sovereign Rating
Sovereign Analyst for Sri Lanka, Sagarika Chandra stated that policy irregularities could be a reason for the low level of FDIs in Sri Lanka.
Although the BOI is supposed to be an investor’s ‘one stop shop’ it is not, and getting approvals prove to be difficult, she added.
Sri Lanka’s sovereign rating which recently moved to Stable from a “negative” outlook was due to improving fiscal performance and better policy coherence and credibility.
More progress on the fiscal front is necessary for a positive rating driver, he added.
Chandra stated that it is too soon to assess the impact of the Attorney General’s recent comments on the sovereign rating and details need to be verified with the Central Bank.
The country’s auditor general has said debt could be up to four percent of gross domestic product higher than reported.
Analysts say Sri Lanka has the 14th best credit rating, according to both Fitch Ratings and Standard & Poors, of B+, which is considered below investment grade and ‘highly speculative,’ while regional countries such as India and Bangladesh score higher.