- Awaiting Parliament approval to raise up to Rs. 310 b
- Samurai and Panda bonds likely along with swaps from Oman and Qatar
- Sovereign bond soon, efforts to build buffer for debt repayments and currency management
- Expects currency to stabilise in next two months on remittances and tourism earnings
- Argues rupee depreciation has been demonised, inflation impact minimal
- Says numbers show depreciation positive for budget
The Central Bank is taking several steps to increase inflows, including Parliament-backed support to raise more funds and expand into Samurai and Panda bonds as well as initiate currency swaps with the Central Banks of Oman and Qatar to raise as much as $2-$3 billion for debt repayment and prevent the disorderly adjustment of the rupee. Central Bank Governor Dr. Indrajit Coomaraswamy speaking at a conference organised by Asia Securities on Tuesday gave extensively details of plans to manage the currency situation and debt repayments that are increasing from 2019 onwards.
Acknowledging the situation was challenging but not impossible, he outlined multiple measures that are in the pipeline to deal with existing challenges.
Sri Lanka’s reserves are currently at $ 8 billion, which is a shade under five months of import cover. However, Dr. Coomaraswamy expressed hope that Parliament this week would approve legislation that will enable the Central Bank to raise up to Rs. 310 billion, which is over what is required for the Government this year and would allow the Central Bank to build buffers for impending liability management.
He pointed out that the $ 1 billion from China Development Bank, which Sri Lanka received recently, could be up-scaled under the Active Liability Management Act and the Central Bank is also exploring Samurai and Panda bonds. The Central Bank is also in the midst of talks with Oman and Qatar counterparts for swap arrangements and is likely to go to the market for an International Sovereign Bond for an unspecified amount “fairly quickly”.
All this would add up to $2-$3 billion of resource mobilisation, Dr. Coomaraswamy, said expressing confidence that the Government has the “firepower” to meet external debt obligations and have extra funds to prevent the disorderly adjustment of the rupee.
The rupee has depreciated by about 10.4% so far this year but the Governor expressed hope that towards the end of this year the currency could see better days as remittances and tourism earnings traditionally rise during the last two months of the year, boosting reserves. Importers for the festive season may have also advanced their purchasing, reducing demand for dollars, he observed.
The Governor argued that currency decline does not necessarily result in an uptick in inflation for basic goods as Sri Lanka is no longer a major importer of rice.
“We have been watching this closely but so far the pass through has been minimal. Interestingly local production of food has been more competitive, helping to keep prices moderate. There is no doubt there is a high import component in our basic consumption and excessive depreciation will have an impact on the cost of living and inflation is a highly-regressive tax on the poor. While the Central Bank has a duty to protect against excessive depreciation, moderate depreciation is good for exports and I see it as an opportunity. It’s also an opportunity to address the fact that our imports are almost double our exports, so we need this adjustment to bring about a transformation. The exchange rate is not the only thing you need, but a competitive exchange rate is a powerful tool to support producers.”
The assumption that depreciation results in the increase of debt is a partial picture, Dr. Coomaraswamy argued, as the dollar amount for debt repayment remains the same but the inflows that come into the Government generate more rupees. Import duties also increase and help to push up public revenue, he contended.
“When you run the numbers, you see depreciation has a net positive impact on the budget. You shouldn’t depreciate the currency just to finance the budget deficit, but it is wrong to say that this is a problem – that if the currency depreciates the debt servicing will be more burdensome. That is only looking at one side of the ledger.”
Dr. Coomaraswamy stressed that Sri Lankans need to move away from equating currency depreciation with economic collapse insisting that this is an erroneous belief.
“In Sri Lanka we think that the fate of the currency is the fate of the economy. But look at the Indian situation, the Indian Rupee has depreciated more than 12% but India has reserves of $ 400 billion and they grew in the second quarter by 8%. So that economy is not collapsing. One needs to understand what is really happening.”
“It has also been said the Ethiopian Bangladesh, and Zimbabwean currencies have depreciated much less than us but that is a mischievous statement because those economies are all low income countries that have little or no exposure to capital markets. When we were a low income country in 1997 and had no exposure to capital markets we were not affected by the Asian Financial Crisis. Korea, Thailand and Malaysia were but nobody in their right senses would say that our economy was stronger than them in 1997. We now have exposure to capital markets and so when there is a exogenous shock we experience it.”