CB stresses on continuation of fiscal consolidation

• Says plans afoot to raise US $ 3bn by first quarter of next year for external debt repayments 
•  But stresses everything depends on govt.’s commitment to bring down budget deficit to 3.5% of GDP by 2020
• Pressure on exchange rate likely reduce in coming months with remittance and tourism inflows 

By Nishel Fernando 

The Central Bank last Friday emphasised on the continuation of fiscal consolidation trajectory, which aims to bring down the budget deficit to 3.5 percent of GDP by 2020, as such is crucial to raise funds in the international capital market ahead of bunching up Sri Lanka’s external debt next year.

Addressing a seminar organised by the Shippers’ Academy Colombo (SAC), Central Bank Governor Dr. Indrajit Coomaraswamy noted that as Parliament has approved a resolution to raise Rs.310 billion by way of loans in or outside Sri Lanka for active liability management, the Central Bank would go to international markets very aggressively to build up the country’s foreign reserves to meet the external debt servicing obligations.

However, he stressed that it’s crucial the government sticks to the fiscal consolidation trajectory as the budget remains the main source of instability. “But, all of this lies on the premise the government sticks to its fiscal consolidation trajectory, getting the budget deficit around 3.5 percent by 2020. 

If the government loses control over the budget, it will be a very sad situation,” he said. 

He noted the budget deficit this year was estimated to be around 5.3 percent of GDP, above the target of 4.8 percent, which was mainly due to flood and drought relief. 

As President Maithripala Sirisena last Friday evening dismissed the Cabinet, including the Prime Minister, sending shockwaves through the country’s political landscape, it is not yet clear whether the new government is planning to present its budget and whether they would stick with the IMF-backed fiscal consolidation programme. 

The next Parliament session is expected to commence on November 16.

Dr. Coomaraswamy noted that next year’s external debt servicing would be around US $5 billion, and the Central Bank on behalf of the government would raise around US $3 billion by the first quarter of next year. 

According to him, the Central Bank would explore all avenues to raise funds to build up buffers— which will include international sovereign bond issuance, US $500 million in Panda and Samurai bonds and swap deals with Middle Eastern central banks. 

Panda and Samurai bond issuances are expected to be finalised within 2-3 months. 

Dr. Coomaraswamy revealed that a US $1 billion swap with the Central Bank of Oman and another swap with the Central Bank of Qatar are also under discussions. 
“It’s a substantial amount. I hope we can finalise them before the end of the year. We are still negotiating and still early days. But we met the governors of CB of Oman and CB of Qatar.  

A lot will depend on the price. For us the yield curve of the dollar denominated sovereign bond is the benchmark. So, we have to get it cheaper than that,” he said. 
Sri Lanka’s reserves are currently at US $ 8 billion, which is sufficient for 4-5 five months of imports. 

Commenting on the prevailing relatively high interest rates, the Governor noted that as Sri Lanka reached its domestic debt repayment peak this year, it impacted the nominal and real interest rates. 

“The total domestic debt servicing has reached Rs.980 billion this year; that’s why domestic interest rates, both real and nominal are relatively high.” 

However, he was optimistic that as the domestic debt repayment will be lower in the coming year, Sri Lanka would be able to reduce its reliance on external debt.  
“The domestic debt servicing goes down to Rs.600 billion and around Rs.500 billion in 2020. So, you see this reduction in domestic debt repayment, which will create more space for us to shift from external to domestic debt going forward,” he pointed out. 

Dr. Coomaraswamy was also optimistic that the pressure on the rupee would reduce in the coming months on the back of dollar inflows and the temporary import restriction measures introduced by the government. 

“As you go into December-January season, you see remittances coming in and also in the tourism sector, more than half of the earnings come during November- January season. Hence, the combination of inflows and various measures taken, should remove the pressure off the exchange rate,” he stressed. 

Speaking of the economy’s health, he said: “We are doing Okay, we are not an A or B country, or an E or F country. We are a C country.”

Dr. Coomaraswamy, however expressed his concerns over the delay in reforms and development programmes, which he said are moving “far too slowly”. 

“There are great plans, but can we implement them?” he questioned. 

Parliament approves to raise Rs.310bn under ALMA

Parliament last Friday passed a resolution to raise Rs.310 billion as the government’s medium term liability management strategy under the Active Liability Management Act of 2018 (ALMA).

The active liability management framework is focused on acting in advance, to re-finance and/ or pre-finance debt repayable beyond the financial year covered under the Annual Appropriation Act.The liability management strategy of the government is planned to be implemented to ease the repayment of debt in the future and ensure that such repayments are done at the lowest possible cost in line with the government’s cash flow, prevailing and expected interest rates and the future maturities of public debt.

The Central Bank said that the framework would allow Sri Lanka to go to markets opportunistically and to build up buffers for future debt servicing. 

The active liability management framework would allow the government and the Central Bank to take several measures to manage the country debt more effectively. They include; buy-back or early repayment of identified loans, issuance of new loans at low interest rates in place of outstanding loans obtained at higher interest rates, lengthening of the maturity or repayment period of identified loans on new terms by way of switches and /or exchanges and consolidation or conversion of identified loans into new loans on new terms.

In addition, Sri Lanka also plans to diversify market-based foreign funding sources to jurisdictions such as the Chinese Panda market, Japanese Samurai market and the very liquid Sukuk market.