Reform agenda key to retain access to int’l capital markets: CB Governor

• Says SL needs to move ahead with proposed amendments to Fiscal Management (Responsibility) Act and new Monterey Law Act
• Wants political masters to realize that Sri Lanka has very little room to manoeuvre with its debt pile 
• Sri Lanka has US $ 5bn debt repayment next year and US $ 4bn on average in the following years
• “We are depending entirely on int’l bond holders and banks for the money we want”- Governor

By Nishel Fernando 

Sri Lanka must fulfil its commitments to foreign investors by moving ahead with the proposed amendments to Fiscal Management (Responsibility) Act and the new Monterey Law Act to ensure access to international capital markets, which is crucial for the country’s debt refinancing. 

“Three months after the political crisis, we were able to raise US$ 2.4 billion by issuing dollar denominated international sovereign bond (ISB) and two months after Easter Sunday attacks, we were able to raise further US$2 billion. 

“We were able to achieve this because of these reforms that we were selling. It’s important that our political masters also understand that we have very little room to manoeuvre as we have to repay large sums of debt in coming years,” Central Bank Governor Dr. Indrajit Coomaraswamy said. 

He made these remarks addressing the inaugural Economic Summit of Sri Lanka Forum of Junior Business Economists (SLFJBE) in Colombo yesterday. The SLFJBE was established by the Department of Business Economics, University of Sri Jayewardenepura.

Dr. Coomaraswamy noted that Sri Lanka’s debt repayment will exceed US$ 5 billion next year and over US$ 4 billion on average during the years to follow. Sri Lanka’s debt repayment obligations reached a record US $ 5.9 billion this year.

“We have to raise US$ 3 billion of fresh money or more per annum to meet these obligations,” he said.

As Sri Lanka has gained higher-middle income country status, Dr.Coomaraswamy pointed out that Sri Lanka has limited access to concessionary loans now.
“We are entirely depending on international bond holders and banks for the money we want,” he added.

President Maithripala Sirisena in a memorandum to the Cabinet sought to delay the approval for the proposed amendments to the new Monterey Law Act (MLA), noting that these amendments should go through a broader stakeholder dialogue and consultation process..

President Sirisena also reportedly suggested that the flexible inflation targeting system under the proposed amendments might not be suitable for Sri Lanka.

As the relationship between aggregates and inflation is getting increasingly weaker, the Governor said that shifting to a flexible inflation targeting framework is crucial to maintain price stability and thereby propel economic growth.

“This is a landmark reform, because historically when there was excessive government expenditure, they got the Central Bank to print money. Under the new Monetary Law Act, the Central Bank will not able to participate in the primary auction of government securities. The Central Bank will be prevented from taking part in the auction by law,” he stressed. 
While terming the money printing as the “worst thing” a central bank possibly could undertake, Dr. Coomaraswamy pointed out that money printing creates inflation and excessive demand which feeds into higher imports and other external sector pressures.

He noted that the Central Bank is already implementing a flexible inflation targeting framework and the Monetary Board has made a decision to not get involved in the primary auction.
Further, he said that the Central Bank intervened only once in the primary auction market to finance the government through money printing during his tenure. 

Dr. Coomaraswamy is still hopeful that the new Monetary Law Act will pass in Parliament after securing Cabinet approval. 

Speaking of the proposed amendments to the Fiscal Management (Responsibility) Act, he pointed out that these amendments will provide necessary teeth to the current Act to force the government to become fiscally responsible. 

“The chances of getting good fiscal outcomes on a sustained basis can be improved if the amendment to the Fiscal Management (Responsibility) Act, which has been passed by the Cabinet, reaches the Parliament,” he said. 

After receiving Cabinet approval early last month, the proposed amendments to the Fiscal Management (Responsibility) Act are currently with the Legal Draftsman’s office, which is to be presented to Parliament soon. 

“We hope it will get into Parliament in this particular electoral cycle,” he added.

The proposed amendments are set to increase responsibility concerning the failure to meet deficit targets.

“There will be very specific reasons when the government could exceed targets such as natural disasters or severe recession due external shocks such as huge hikes in oil prices. 
When there’s a breach of targets, the government will have to set-out measures that will meet the targets on time,” Dr. Coomaraswamy elaborated. 

He believes that the proposed amendments will be crucial to reduce the current budget deficit down to the 3-3.5 percent range of GDP while enhancing the State revenue up to 16-16.5 percent of GDP. 

“This is the level of budget deficit that can be financed without getting the debt dynamics out of control,” he said. 

By not actively pursuing the promised reforms, he warned that Sri Lanka may risk losing the confidence of foreign investors which could force the country to default debt. 
However, he stressed that the CB is more than confident in meeting its debt obligations with the government sticking to its reform agenda.

Calling of RFPs to raise US$ 500 mn via Samurai bonds

Sri Lanka plans to call request for proposals (RFPs) in two weeks to raise US $500 million from a yen denominated Samurai bond before the election cycle begins.  

Central Bank Governor Dr. Indrajit Coomaraswamy told Mirror Business that the government would complete the required administrative process within two weeks including the securing of Cabinet approval to appoint a tender board in order to call RFPs. 
Sri Lanka is likely to issue a 10-year Samurai bond worth of US $500 million with a guarantee from the Japan Bank for International Cooperation (JBIC).

However, the Governor stressed that the issuance will entirely depend on the interest rates. 

“We will only take it if it is less than the rates of dollar denominated international sovereign bonds (ISB),” he said.

The Samurai bond is expected to be coupled with a yen to dollar foreign exchange swap.

The Governor said that international rating agencies are likely to upgrade Sri Lanka’s sovereign rating following the elections.