Treasury Chief urges help for balance of payments

Reuters: Sri Lanka needs flexible exchange rates and tighter monetary policy to curb cheap imports that are putting pressure on the country’s balance of payments, Treasury Secretary P.B. Jayasundera said on Wednesday.

Jayasundera, the most influential economic policy official serving President Mahinda Rajapaksa’s Government, said the country can sustain its growth target if the weak external sector can be addressed.

The $ 50 billion economy’s trade deficit doubled in the first 10 months of this year to hit a record $ 7.73 billion, exceeding the annual record deficit of $ 6 billion hit in 2008.

“The real economy can’t grow by widening external imbalances,” Jayasundera told Reuters in an interview in which he underscored policy differences between the Government and the Central Bank.

Sri Lanka expects to sustain eight per cent economic growth in 2012, for a third straight year since the end of a 25-year war in May 2009, while containing inflation to less than seven per cent.

The country’s current account deficit stood at $ 3.25 billion by end-October while the central bank was heavily defending the rupee currency against depreciation.

“Unwarranted imports have taken place… as they are so much cheaper,” Jayasundera said.

The Central Bank’s defence of the rupee and its policy of keeping interest rates at more than six-year lows had led to cheap imports but penalised domestic production of goods such as steel, cement, dairy products and sugar, he said.

“Domestic credit and foreign exchange need to be corrected” to tackle the trade deficit, he added.

Rajapaksa shocked markets last month with a three per cent currency devaluation aimed at making the island nation’s exports competitive.

But since the 21 November devaluation, the Central Bank has been defending the rupee at 113.90 to the dollar by selling more than $ 645 million from reserves in this period alone.

“Definitely we need a correction on interest rates,” Jayasundera said. “We need monetary growth of less than 16 per cent, but it is around 19 per cent. That excess three per cent must be wiped out in the first half of 2012.”

“The balance of payment structure needs to be shifted quickly,” he said referring to reorienting the external economy to boost exports and maintain only essential imports to reduce pressure on the balance of payments.

Sri Lanka, which has had no trade surplus since 1977, faced a balance of payments crisis in 2008 after the central bank heavily defended the rupee as foreigners withdrew from Sri Lankan Government securities during the global economic crisis.

Since then it has posted a balance of payment surplus mainly due to borrowings and a $ 2.6 billion loan from the International Monetary Fund (IMF).

The global lender, which welcomed the devaluation as “a right step,” has withheld the eighth tranche of the loan after the central bank disregarded its longstanding call to allow exchange rate flexibility.

However, Central Bank Governor Ajith Nivard Cabraal, contrary to Jayasundera’s view, has said the bank can continue to support the rupee by selling dollars from foreign reserves as it expects large dollar inflows in the coming months.

Sri Lanka has now allowed commercial banks and corporates to borrow money from foreign sources with a view to reducing hefty demand for dollars and pressure on the balance of payments.

“An enabling environment to conduct a flexible exchange rate with less volatility without too much intervention of the central bank has been now created,” Jayasundera said.

Sri Lanka aims for $ 1.5 billion foreign direct investment in 2012, from this year’s around $ 1.1 billion, Jayasundera said.