Central Bank Governor Dr Indrajit Coomaraswamy – Pic by Upul Abayasekera
By Uditha Jayasinghe
The Central Bank yesterday kept growth rates steady despite persistently high credit growth but warned that the Government’s revenue targets could come under pressure unless the proposed VAT increase was implemented “as quickly as possible.”
Central Bank Governor Dr. Indrajit Coomaraswamy told reporters that the economy was broadly on track to meet its growth target of 5.5% and mid-single-digit inflation but admitted there were concerns over the Government’s ambitious fiscal consolidation plan being derailed if tax increases were not approved by Parliament in the next few months.
The Central Bank and the Finance Ministry are readying for a review by the International Monetary Fund (IMF) in September ahead of the second tranche of the $ 1.5 billion Extended Fund Facility (EFF) being approved, possibly in December.
The first tranche of $ 161 million was transferred following the formal approval of the EFF in May 2016. Increasing public revenue through a progressive tax regime is at the core of the agreement between the Government and the IMF.
“If there is a significant shortfall of revenue clearly that would have a number of ramifications. One is if the fiscal consolidation trajectory is deviated from there would be more demand pumped into the system and would create certain pressures in terms of inflation as well as leakage into the balance of payments. The Central Bank would be concerned about that.
“The second factor is there are certain targets built into the EFF of the IMF and if the revenue shortfall is significant, clearly that would make it more difficult to achieve those targets. Even more than the money involved in the EFF it is the signaling effect that is associated with the EFF. Already we have seen benefits. Part of the reason why the sovereign bond issue went well was because we had a program.”
Dr. Coomaraswamy reiterated that the fiscal consolidation program was essentially to sustainably develop Sri Lanka and IMF involvement was merely to ensure that it could be carried out with fewer “painful” adjustments. He insisted that Sri Lanka was “broadly on track” to meet IMF targets in the pending review. Performance from October to December is likely to be reviewed only in 2017.
“I like to see the stabilisation program as something that is necessary for Sri Lanka and the IMF is basically supporting a program that we have to undertake. What is useful about the program is that this money plus the money that it helps to catalyse makes the trajectory of adjustment less painful. That’s the way to look at it. Whether we have the progam or not we have to do fiscal consolidation because our debt dynamics are such that we can’t continue to live beyond our means.
“A major part of the Government’s stabilisation program is fiscal consolidation and a major part of that is increasing revenue and the central part in increasing revenue is VAT. Clearly it is important that we need to resolve the VAT issue as quickly as possible.”
The Governor downplayed fears of a policy hike by the US Federal Reserve as already being “built in” to investor projections and stressed that his institution would continue to observe developments. He also noted that the Government would not need external borrowings for the rest of the year.
“The Government is undertaking a major tax review and the outcome of that review will be presented in the Budget speech in November. At a time when the Government has very limited fiscal space and it wants private investment to play a bigger role in the development process, you have to then balance out whether this is the right time to be increasing certain direct taxes because you might disincentivise investment if you move too quickly in that direction. So these are all things that need to be balanced out. Once private investment picks up that may be a better set of conditions to move towards greater reliance on direct taxes,” he said.
The Governor was also optimistic private sector credit growth would slow down to about 18% by year end. Public enterprises were also repaying their loans to State banks with Rs. 46 billion being transferred so far this year, mostly from the Ceylon Petroleum Corporation (CPC) bolstered by low oil prices.
No threat from Fin Min agency says Governor
Central Bank Governor Dr. Indrajit Coomaraswamy yesterday clarified the function and mandate of a new agency to be established under the Finance Ministry to assist troubled non-bank finance companies.
Cabinet recently approved a proposal by Finance Minister Ravi Karunanayake to establish a special agency to assist loss-making finance companies to make a turnaround. The proposal was severely criticised by economists as possibly undermining the Central Bank’s authority to regulate and monitor finance companies. There was also concern that public funds would be used to bail out badly managed finance companies and remove responsibility from the company heads.
“We are working on trying to infuse capital into some of these companies and as much as possible have a market oriented private sector solution so there is no call on private resources but that it very much an ongoing process,” the Governor said in response to questions.
“The idea is to take over some of the assets of distressed finance companies and to see whether those can be managed in such a way that can help support these companies. It’s kind of an asset management entity. Supervision and regulation will remain with the Central Bank. But the agency will act on behalf of the companies it will not be a case of the Government acquiring these assets but to manage them.”