CB dismisses claims of external sector crunch amid dwindling reserves

Prof. W.D. Lakshman

• Governor Lakshman assuages concerns over disruptions to imports and debt serviceability 
• Says no disruption to trade except for certain non-essential imports 
• Assures timely settlement of foreign debt obligations
• Stresses conditions of foreign currency liquidity observed in domestic market now are temporary

Central Bank Governor Prof. W.D. Lakshman in a fairly detailed statement issued yesterday dismissed the repeated concerns raised by certain quarters of an imminent external sector crisis brewing in the country, often citing weaker external reserves, ahead of the upcoming foreign currency debt obligations.

Brushing aside the claims made to the effect of dissuading banks from facilitating imports, due to an assumed shortage of foreign currency liquidity in the domestic market, Prof. Lakshman said that no disruption to trade except for certain non-essential imports has been exercised and they are working closely with commercial banks for judicious management of imports and foreign reserves.  

“….it must be noted that the government and Central Bank have ensured that trade is not unduly disrupted and intermediate and capital goods imports are given priority in the process of imports,” he said. 

“Total import values have remained considerably high at a monthly average of US $ 1.7 billion during March, April and May 2021. High import values in these months show that importers, particularly of essential goods, have not been overly inconvenienced as the published media reports claim,” he added.

Since of late, concerns were raised by various parties over the country’s ability to continue to maintain its imports and to settle its foreign debt commitments, as foreign reserves fell to US $ 4.0 billion in May, barely sufficient to cover three months of imports, while the other inflows such as merchandise exports lost their momentum.  The tourism trade, which has the potential to generate over US $ 4.5 billion annually, has been in limbo since March 2020, due to the resurgence of the virus.

However, Prof. Lakshman reassured of timely settlement of foreign debt obligations as and when they fall due, as the Central Bank and government have lined up number of inflows to support the reserves and expressed hope that other inflows would normalise in the next few months.

Sri Lanka is set to settle a billion dollar sovereign bond on July 27, of which about 30 percent is held by local residents. 

Among the expected inflows are the US $ 250 million swap facility from the Bangladesh central bank expected in July, US $ 400 million from the Reserve Bank of India under the SAARC Finance Swap in August, special swap facility of US $ 1.0 billion being negotiated with an Indian counterpart and US $ 780 million from the International Monetary Fund under its Special Drawing Rights allocation, which is also expected in August.  Sri Lanka already has a US $ 1.5 billion swap facility, which the Central Bank entered into with the People’s Bank of China in March. But it doesn’t form part of the existing reserves, as Sri Lanka hasn’t yet drawn it down and is instead keeping it as a buffer.  

Further, Sri Lanka expects to collect up to US $ 700 million as non-debt-creating inflows from the export proceeds and worker remittances.

The Central Bank also pins hopes on the private sector to raise foreign currency funds, making use of the recently eased regulations on foreign borrowings by the corporate sector and the recently enacted Colombo Port City Commission Act to generate non-debt creating inflows via direct investments.  “Overall, I wish to assure the media, public, business community and investor community that the conditions of foreign currency liquidity observed in the domestic market at present are temporary and are driven by excessive speculative activity,” Prof. Lakshman said. 

“We request these operators in the market to remain calm and not fuel undue speculation, which is not in the national interest, as the careful management of the situation without undue disruption, will result in a beneficial outcome to the country as a whole,” he stressed.