Giving direction

The Cabinet reshuffle this week was followed by mixed news from the Central Bank, which pointed out that while Sri Lanka’s fiscal consolidation process was bearing fruit, garnering greater international confidence, the economy desperately needed the Government to fast-track crucial structural reforms to attract investment and improve exports. 

The Central Bank noted it would be instructive to gauge the level of external support for the Sri Lankan economy from international capital markets. This would be an independent barometer of the health of the Sri Lankan economy as international capital markets are hard-nosed in their assessments, it asserted. 

The Central Bank in a statement released a list of developments, which it insisted was evidence of improving global confidence in the Sri Lankan economy and its prospects. It highlighted a staff-level agreement reached on the 4th Review of the $ 1.5 billion Extended Fund Facility (EFF) Sri Lanka has with the International Monetary Fund (IMF), subject to Cabinet approval of the automatic fuel pricing formula. The 5th tranche of the IMF facility is expected in June 2018. After June 2017 the IMF had issued several positive statements regarding improving macroeconomic stability and outlook. 

Last year two ratings agencies, namely S&P and Fitch, changed the outlook to stable from negative, the Central Bank observed.  It listed the largest ever International Sovereign Bond (ISB) amounting to $ 2.5 billion which was successfully issued as one such example. It was 2.6 times oversubscribed. 

Large orders were placed by some of the world’s largest and most reputed investment funds. With the receipt of ISB proceeds, gross official reserves have increased to $ 9.9 billion which is historically the highest level.

However, there is still much work to be done. One of the biggest issues that has cropped up in 2018 is political instability. Successive Cabinet reshuffles, the proroguing of parliament and potential crossovers have shifted crucial focus away from the economy and delayed policy implementation. 

Given Sri Lanka’s increasing debt repayments that will begin in 2019, the Government has a shrinking window to bolster exports and investment. Another point of concern is increasing global interest rates and rising oil prices, both of which could have a deep impact on Sri Lanka’s economy. The latter would also increase losses of State Owned Enterprises unless the Government speedily puts a transparent pricing formula in place. 

It also has to guard against inflationary pressure caused by currency depreciation. Over the last few weeks trade unions have agitated for salary increases and even the private bus owners association has called for a price increase. Wage pressure and political moves to win votes could result in fiscal slippage that could in turn increase inflation, making it harder for the Government to stay the course of fiscal consolidation. 

In such a situation it is imperative to build upon recent positives by persisting with sound macroeconomic policies: fiscal consolidation, prudent monetary policies and a flexible exchange rate which supports the competitiveness of the economy. 

This should be supported by the acceleration of structural reforms to strengthen factor markets; improve the investment climate; boost investment promotion; introduce trade facilitation measures; and complete trade negotiations. After more than three years the Government is fast running out of compromises.