Sri Lanka’s external situation manageable, but more FDI needed: Governor

Indrajit-Coomaraswamy

Feb 08, 2017 (LBO) – Sri Lanka’s external debt situation is manageable. However, the current challenge is to increase inflows from exports and FDI, Central Bank Governor Indrajit Coomaraswamy said on Wednesday.

“The external debt situation, in our view, is manageable. Sri Lanka has never defaulted on a payment. But the challenge for the country is to create non debt-creating inflows.”

“Our short term borrowings are relatively high, we would like them to be a lower proportion compared to reserves.”

Sri Lanka’s outlook on the external front has been under pressure due to rising external debt servicing payments in recent years and weakness in government finances.

The delayed Hambantota port sale, and divestment of non-strategic assets like hotels, commercial property could see up to two billion dollars in inflows potentially flowing in to the country, he said.

“We can use these funds for liability management. It would reduce the burden of debt servicing on the public.”

Syndicated loan, sovereign bond

To bridge the government’s budget deficit, a syndicated loan up to a billion dollars, and a sovereign bond issue up to 1.5 billion dollars has been discussed, Coomarasway added.

Cabinet approval for the sovereign bond will be sought in the next few weeks.

When asked if the economy was on the right track, Coomaraswamy said sound macroeconomic fundamentals were essential. After a reversal in recent years, the government, with its fiscal consolidation targets, was heading in the right direction.

Partly due to continued selling of government treasury bonds by a foreign fund, foreign reserves dipped to 5.5 billion dollars in January, from 6 billion dollars at the end of December.

The central bank expects this figure to pick up to 7.5 billion dollars by the end of the year.

Supply side pressure

The central bank held policy interest rates unchanged this month, with headline inflation remaining within the target band around 5.5 percent in January, even though core inflation spiked to 7.0 percent.

“We need to examine what caused it. There was a rebasing by the Department of Census and Statistics.”

The weightage of non-food items increased to 70 percent, while a 15 percent value added tax on education fees and supply disruption related to the drought contributed to core inflation.

“It is not really demand side pressure that has contributed to inflation. As a result it would not be appropriate to adjust interest rates,” Coomaraswamy said.

“We didn’t see significant signs of excess demand coming into the system. Having said that we are going to monitor the situation closely.”

State banks continued with strong credit growth of 30 to 32 percent, even though the comparable figure for private banks was below 20 percent.

“We don’t have issues about particular lending, but state banks have responded less to the tightening of monetary policy. We will have a conversation with them about that,” he said.