Substantial reduction in GDP due to lockdowns Ajith Nivard Cabraal-Central Bank Governor

• Economic recovery - a serious operation 
• Confident that delivery is possible to reach pre-pandemic levels
• Says there will be sufficient inflows of foreign exchange  
• Further swap arrangements with other Central Banks of the world
• Some other restrictions placed on imports are not necessary because of foreign currency shortage

 Newly appointed Central Bank Governor Ajith Nivard Cabraal, in an interview with Daily Mirror, speaks about plans to bring back the economy to pre-pandemic levels and overcome the foreign exchange crisis. He speaks with confidence that there will be sufficient inflows to overcome it.  

Excerpts :

QHow big is the economic impact of this pandemic?

The pandemic affected us in two ways.  One is the general reduction of the Gross Domestic Product (GDP). The other is the impact it had on businesses.  Both those are fairly severe.  As far as the GDP is concerned, reduction is substantial. Each day there is a loss we incur.

At the same time, many of the businesses - even big businesses - have been affected by the lockdown. It means that their businesses are not normal. Also, there is a substantial reduction of economic activities which have affected those institutions as well. 

QIn your road map for short term economic stability, you did away with the 100 percent cash deposit margin for the import of items deemed non-essential.  Why did you do it?

We want to show that our policies set in motion to encourage new inflows will work. It is a better way of showing confidence in our own assessment. Then, the need to restrict will not be there. We are confident about our inflows. That is why we want to make sure that those doing businesses can do it comfortably.  We actually want them to do business.  At the same time, we want to give a bit of advice on how it should be done. If they follow that, there will be no problem whatsoever.  

QYour predecessor did it to reserve dollars by discouraging imports considered non-essential. But, you undid it. Why?

We are looking at it in different ways. One is the need to conserve it on the ground that we have difficulty in getting US dollars. We are taking a different view.  We are seeing that inflows will come in.  If inflows are coming in, there is no need to restrict as we have done in the past.  What we have set in motion are various programmes and policies that would attract more and more investments in as well as more inflows to come in. Then, there is no any need to make any restriction as well.

 
QYou speak with such confidence about possible inflows. What are the kinds of investments and inflows lined up at the moment?

I have done that before. You know I was the governor of the Central Bank in the past when we had various, serious difficulties, particularly during the recession, the global financial crisis and our own war. We had taken a call how we should deal with it. We are now drawing on those experiences. We know that, at certain times, there would be some difficulties. We are confident. Once you have put all the building blocks in place, we will be in a position to deal with these challenges in a reasonable manner that it won’t impose additional burdens on people.  

QHow do you compare and contrast the situations now and then?

Stress will be there. That is, of course, to be said. However, the tools that we use as well as the steps that we take could be different.  We have to take steps as we go along. I mentioned it in my speech. It is like a 50-over match. We come in a time with four wickets down, and not many runs on the board. You first consolidate it. Thereafter, you make sure that you don’t lose any more wickets. You consolidate. Then, you get eyes on better.  Then, you will start playing a few more shots. At the end of the match, you will play some very good strokes to win the match. If you follow that principle, you will find that it is much easier to tackle problems of this nature than otherwise. I am not saying exactly like a match. 

QYou mentioned in your plan that there will be US $ 7 billion inflows this year and another US $ 11 billion next year. Can you elaborate more on it?

What I mentioned there is that we started off with US $7.6 billion reserves.  Then, we had paid by 2020 as much as US $ 6 billion.  In 2021, we have paid further US $ 5.6 billion. That means US $ 11.6 billion has been paid. Then, we already have US $ 3.5 billion in cash and another US $ 1.5 billion.  

That shows that you can manage your cash flows. That is what it means. People cannot say that your reserves are this much, and you have to pay that much. 

We have gone through these kinds of situations. We have proved in 2020 and 2021 that we have been able to manage that. We will use various steps to deal with it. We have given our way in which we will have inflows coming in. When inflows come in, we will manage outflows. That will be the story we are unfolding.

QIs it possible for you to specify the kinds of investments lined up?

We have identified various swaps we can have with the Central Banks of other countries. We have identified government to government to inflows - loans in various forms .We have already started the negotiations.  I will be making some visits to different countries to finalize some of those arrangements. First we have to get the parametres in place.  We have also identified various underutilized assets which we can use to monetize. Then, we can have inflows coming in.  In these different ways, we have also looked at new FDIs (Foreign Direct Investments) for the Port City, Hambantota Zone and the pharmaceutical zones. All those are materializing.  You saw how the agreement for the development of the West Terminal of the Colombo Port was signed. There are various ways in which these flows will happen. That is why we are confident. In fact, we have listed those out.  We will approach them one by one and make sure that they will materialize.   

QWhat are those underutilized assets and plans for the development of them?

We have listed them out. Those are identified as assets with potential to generate new inflows into the country. For example, there is Gafoor building. We all know it has been around for a long time with no economic activity whatsoever. If 

we can monetize that, we will have cash inflows.  You have seen that with the Race Course in the past. 

QHow far have you progressed in this regard?

We have progressed quite a bit.  We have listed all those assets. We are having negotiations with different parties to see how we can rekindle interest.  As far as some of them, we are in the advanced stage of materializing them. There is a quite a bit of interests as far as those assets are concerned. 

QYou have five percent economic growth target for this year. How realistic is it?

It is very realistic. First half of the year, we recorded eight percent growth. It is mainly because of the low base of last year’s slowdown. But, in the third quarter, even with the lockdown, a lot of people were involved in economic activities. Some of the major industries were working. We are confident that we will have at least one percent growth in the third quarter which we just completed. In the fourth quarter, we expect 3.5 or four percent growth.  It means we can end up with comfortable five percent growth. Next year, based on steps we are taking as well as the general feedback we are getting, we will be able to have six to 6.5 percent growth. We will strive for that. In these circumstances, you have to work towards those goals.

What we have done in the Central Bank is that we have got groups ready to support those targets we are pursuing. In consultation with other stakeholders, we are confident that all will deliver.

QCommenting on money printing, you said it is needed to spur demand in a crisis situation like this. You said you know when to do it and when to take it back. Is this the time to stop money printing?

It is not to stop. We can see how best we can reduce it. At the same time, it is not to rule it out either. We are also looking at those options. It is a matter that has to be carefully managed. I will give you the example of a surgeon who cuts you open. Once you cut open, you have to know when to stitch back. You must know how to stitch back. If you let a person, who does not know how to stich back, cut you open, you will be in trouble. Here, the Central Bank has taken a careful call. You know there is some pressure that could build up by having additional treasury bills being put into the market. We also know when that has to be stitched back.

We believe right measures, taken at the right time, will not provide that additional spurt for inflation to take place. That is the balance we have to strike.

QHow long will it take for you to stitch back?

We will take a little time. That again depends on the operation itself. If the patient is not ready to be stitched back, you won’t stitch it back. 

QHow serious is the operation?

It is a serious operation. It is not an easy operation. People must not think that it is an easy operation and can be cured without cutting open. All over the world, people have begun to realize that it is a serious operation. It needs some serious steps to be taken. You must allow the experts to do it. If people watching the operation from outside says now it is the time to stitch back or cut, I don’t think that is going to work. What is happening is that those onlookers are making a dance and song. Well, we have no objection to that.  People must not believe that story.  People should allow the team to do that.  Then, they will deliver. 

QHow long will it take for Sri Lanka to reach the pre-pandemic level of our economy? 

We have to see how we are going to manage the pandemic. I think the steps we have so far taken gives us optimism. At the same time, we have to take right steps to get out of the pandemic. We are preparing the country to open up for tourism. We are making it as normal as possible. We are getting people to adhere to health measures. With those steps that are being taken, I am confident that we can get back to the pre-pandemic situation even with some of the challenges we are facing.  We have put a six months’ time horizon for it. During the six months, we are showing that we are preparing the country to deal with the pandemic, the fallout of the pandemic and to be ready for the   post pandemic situation.  We cannot suddenly think that the pandemic is over. 

QHow are you getting ready for huge debt instalment payments due next year?

We are fully ready for it. We know exactly how we are going to handle it. When we had US $ 7.6 billion, people did not ask how you paid US $ 6 billion, and had US $ 5 billion more in your kitty. We will manage with inflows we are having. We are having a very clear plan to shift some of the manners in which ISDs (International Sovereign Bonds) have been borrowed. We are going to change the mix of our debt. Some of the ISDs will be settled via other inflows.  Then, we will be in a much more sustainable debt position. 

QWhat are the plans by the Central Bank to intervene in containing the cost of living?

We will keep the interest rates as tights as possible. Then, people won’t have addition payments for interests.  Also, we will keep the exchange rate stable.  We import US $ 20 billion worth items. If the exchange rate depreciates by Rs. 10, it means your imports will go up by Rs. 200 billion. You have to have a stable exchange rate.  Through that we will be able to deliver price stability. 

Even in the last few months, keeping the low interest rate saved the government about Rs.313 billion and more than Rs.300 billion for the private sector. If that Rs.300 billion were not saved, that would have been passed down to customers. 

QImporters still raise concerns about the lack of US dollars to finance their businesses. How long will it take to normalize the situation?  

Within the next two weeks, it will be normalized. 

QWhat are the other import restrictions which you are going to lift?

It will take longer for vehicles. We are examining options whether we can import vehicles in a different format. We are still at the nascent stage. But, we believe some interventions may be necessary because vehicle prices are ballooning. It is not a very good thing. We also have to find ways and means of addressing that. 

Some other restrictions placed on imports are not necessary because of foreign currency shortage.  Those were national policy oriented measures taken to deal with certain imports. That was policy driven measures.

 
qBut, those measures are yet to yield. What is your view?

Those measures are not meant to yield overnight.  The government must also have the willpower to wait for that to occur.