CBSL Chief speaks out on challenges and opportunities with CNN

Central Bank Governor Dr. Nandalal Weerasinghe 

Central Bank Governor Dr. Nandalal Weerasinghe gets candid about the challenges and opportunities to put things right in terms of the economy in an interview with the CNN on Tuesday. Here are excerpts from the interview.

Q: I know you are new to the job you only took over as Governor back in April, but I just want to get your view on what we are listening to. Do you agree with the Acting President that the former Government lied to the Sri Lankan people about how bad the financial and economic crisis in the country was?

As the Central Bank Governor, I do not think it is appropriate for me to comment on political administrations, previous or current. But I can say one thing that the previous administration of the Central Bank and Government had a different economic model that they were pursuing, what they described as a “homegrown model” where they insisted that Sri Lanka did not need support from the International Monetary Fund (IMF) for a bailout and do not need to restructure external debt. 

However, since I took office, we convinced the same administration with a different view to turn around the country and it was important to seek support from the IMF on a bailout package and restructure our debts. Since then, the administration has taken a different path even with changes in the Government. 

Q: What do we need to focus on in the future and where do we go from here? Is it a new Government or at least a new leader elected very quickly with a new Government that can be in place? We also know that countries burn through cash reserves incredibly quickly. How concerning is the situation today? Does the country have enough money beyond the end of July to make fuel purchases for example?

Yes, the available liquid external reserves in the central bank are very low – almost non-existent because whatever the amount we had was utilised to support the import of some shipments of petroleum products and some to the gas suppliers. 

With that, we have been able to secure some shipments of petrol and diesel for the next couple of weeks, but beyond that, it is the responsibility of the Government to secure some short-term bridge financing to import essential items for the next three to four months, until we can get the bailout package from the IMF – probably somewhere in December. 

This is a challenging time. From next month onwards, we are negotiating with some of our friendly countries like India and China for bridge financial facilities. For that, the administration should start approaching those countries for short-term financial facilities to ensure essential items for the public to operate their day-to-day activities smoothly.

Q: You have currency swap arrangements in place with India and with China, are they willing to help before an IMF bailout program is in place or is that support contingent on the other help?

So far, India has been helping a lot in terms of short-term bridge financing facilities. They already provided a $ 1 billion credit line to import essential items from India and provided an additional $ 500 million petroleum facility which has been already utilised. There was also an arrangement called Asian Clearing Union liabilities which were utilised around $ 2 billion during the last six to seven months to import certain items.

We hope that India will continue to support us going forward in the next couple of months. However, this will all depend on what the new administration will discuss with India. Also, we have requested China to relax some of the conditions in one of the facilities we have obtained. If those two countries will agree or continue to support, then Sri Lanka can improve the situation until we go to the IMF. 

Q: The question is how long it will take, and the Acting President suggested that negotiations with the IMF are nearing a conclusion. Is that your understanding as well or do you believe that this still could take several weeks to negotiate?

With the IMF negotiations, we want to reach a staff-level agreement which means the first step in the bailout program. The macroeconomic program we require has been presented to the IMF at the technical level. If there was a stable administration, we could have reached a staff-level agreement by the end of this month. 

However, if there is a delay in forming a Government then the IMF needs a commitment from the new administration on the policies we will adopt at the technical level. For that process, the time required will depend on the new administration’s approach or agreements which we have already presented to the IMF. 

If they agree quickly, then we can reach a staff-level agreement – but that is just one step. Beyond that reaching an agreement with our creditors on debt restructuring will take another couple of months. Until we reach an agreement with the creditors, only then the IMF can disburse the funds to Sri Lanka on a balance of payments (BOP).

It all depends on these negotiations and your actions at the Central Bank are also dependent on how the next Government behaves too. 

Q: When you came to the Central Bank, you immediately raised interest rates to try and control inflation. Is this as high as interest rates need to go or might they have to go higher?

 These are the highest interest rates we have ever had in Sri Lanka so far. Whether we need to further raise the interest rate in the future depends on inflation and the recurrent expectations. What we think now is that the Central Bank has tightened the policy rates enough for the next 12 months. If we see the inflation is going beyond our expectations, we might have to tighten the policy rates further. 

Irrespective of the administration, the Central Bank will implement the monetary policy “independently” to curtail inflation. However, to tackle the macroeconomic imbalances, the support of the monetary policy alone is not enough. It requires a combination of monetary and fiscal policies, as well as the structural reforms in the State-owned enterprises (SOEs) work simultaneously, to make a positive impact on the macroeconomic stabilisation process.

Although certain monetary policies will have some impact on correcting the economy, to be able to achieve an overall macroeconomic balance we need the support of fiscal policy as well as structural reforms. 

Q: At this time of deep political instability in the country and pain for the people, what can you say to Sri Lanka to give them some comfort at this moment?

 I think in my view, we have a clear program and if we follow it by reaching IMF and creditors – I’m confident that Sri Lanka could come out of this situation within about four to five months. However, until then all Sri Lankans will have to go through a difficult time to be able to overcome the economic crisis. If people can be patient with the new administration on the recovery measures, we will have light at the end of the tunnel. 

I am confident that if Sri Lanka has a stable administration from tomorrow onwards, then we can make strong decisions the administration and we can extend support via the monetary policy – together we can come out of the crisis.