Money printing is like drastic treatment to a major illness - Ajith Nivard Cabraal

• It won’t lead to inflation under special circumstances like this
• We will make sure Sri Lanka will not default
• No alarming foreign exchange crisis
• The opposition’s dream will not come true
• We have to conserve foreign reserves by imposing import restrictions

State Minister of Money, Capital Markets and Public Enterprise Reforms Ajith Nivard Cabraal,
in an interview with the Daily Mirror, takes questions regarding the present foreign exchange crisis and allegations about money printing.  
Excerpts: 

  Q:    Now, the opposition politicians talk about a severe foreign exchange crisis. They said the foreign reserves had dropped to US$ 4 billion, and US$ 2 billion would be spent for debt servicing soon. What is left is a small amount then. How serious is the crisis?

When we left the government, there were foreign reserves amounting to US$ 8 billion. The Yahapalana government borrowed a debt of US$ 12 billion. Then, they should have reserves close to US$ 20 billion at least. Unfortunately, our reserves were only US$ 7.5 billion when we took office again.  We started off with a fairly difficult position.  We thought we would be able to manage with it. But, with Covid-19, we lost the major income streams. Tourism is one. It was an industry providing us with US$ 4.5 billion.  That put some pressure, no doubt. That is why we have to conserve foreign reserves by imposing some import restrictions. That was not an easy decision to take. But, we took that decision.  We also started quickly concentrating on getting our exports back. We started work on remittances to be improved, non-debt revenues, incomes and inflows to be enhanced.   That is why, even though we have reached somewhat a challenging position, we have been able to manage it without any undue alarm. As you know, once our government came into being, we negotiated US$ 1.5 billion swap with China.  We have been successful in getting another swap with Bangladesh- US$ 250 million.  We are getting another swap with India – US$ 400 million. In addition, we are negotiating with India for another swap of US$ 1 billion.  That is for us to tide over this period. Once we are able to get tourism back as well as other reserves to perform properly, we will be able to manage the situation without any problem.  In addition, we are   also receiving from the International Monetary Fund (IMF) a further allocation of US$ 800 million under Special Drawing Rights (SDR).  We will have no difficulty at all in servicing our debt. Just a few days ago, we saw that all the Sri Lankan prices of International Sovereign Bonds have improved tremendously.  

All the negative stories that have been planted as well as propagated by the UNP, SJB and JVP have not worked. We are able to get a much better understanding by the overall global community.  Barclays has said Sri Lanka has turned the corner. The same thing was expressed by several other investment banks as well. We are confident of dealing with this situation. Although it is challenging, we will make sure Sri Lanka will not default, and will be able to have a lot more inflows which are not creating debt within the country. 

"At this moment, any downward revision is not possible. If the world market prices come down, we can consider. There is a steep increase in the world market now. That is perhaps because the world is opening up. Then, the demand for fuel is rising. We have to watch this situation quite closely and decide how best we can manage it"

  Q:    The opposition’s argument is that the meagre foreign reserves left after debt servicing will suffice for imports sufficient for a couple of months only.  What is your view?

That is not correct. I mentioned to you all these swaps, IMF’s SDR allocations and the foreign exchanges the Central Bank is buying. We have now made it compulsory for exporters to convert at least 25% of their foreign earnings. All these measures are having an effect. The opposition’s dream won’t come true. 

  Q:    The government has imposed import restrictions affecting certain economic activities.  Are you planning to do away with restrictions now if you are confident of securing sufficient foreign reserves?

Once these measures actually take full effect, we will make sure that we tide over these difficulties. It is like what happens to a person who lost one of his income streams, suppose, he has three income streams. If he loses one, he changes his lifestyle. If he continues the same way otherwise, he will be in trouble.  As a responsible government, we change the way we operate. We have to restrict certain imports. Once the situation comes back to normal, with earnings from tourism intact, we will be in a position to get back to normalcy. At that time, we will also have some new streams which we did not have earlier. We are identifying certain key projects in which the government and the private sector can be in partnerships. With that, we can get new investments coming into the country. In addition, of course, we have the Colombo Port City. That will also attract more and more new capital into the country. All these will make sure that Sri Lanka will not have external debt problems. 

  Q:    But, some importers complain about problems in exchanging for US dollars to import even essential items. How true is it?

There are instances of some importers having difficulties. That is changing again. In April and May, there was a bit of a shock as soon as the country slowed down after the closure. Many exporters began to hoard their dollars without converting. When the dollar inflows were interrupted, we found that some of the imports also couldn’t get financed. That was actually temporary. Now, we have seen it easing off. Within the next few weeks, it will ease off completely. Then, this complaint will dry up. 

  Q:    How soon will you be able to remove import restrictions?

I don’t want to commit myself to a particular date. But, we are in the process. You would have noticed. We have relaxed some of the restrictions. Then, we also relaxed some of the measures such as delayed payments. There has been a staggered process of relaxation. It is in progress. In due course, once the situation improves, we will make those relaxations as well. That is until we get a complete idea after the country opens out. That is why we are very keen on vaccination. All these are inter-connected. Once vaccination is done, we can open out the country.  Then, we can get tourism back on tract. Once tourism is back, we will have a lot more inflows coming into the country.  The world’s reaction is also important. 

  Q:    How is the response from exporters to surrender part of their income?

Initially, they were a bit reluctant. But, with a mix of regulations as well as creation of awareness, we begin to see that they have also changed their stance. I had a very good discussion with the key exporters.  We find that they have a much greater understanding of the need to work together. That is to make sure that Sri Lanka progresses in a calm fashion. I think the mood has changed quite appreciably. We will not have too much difficulty there. Even the black market has eased from the levels it was at one time. It shows that there is change in sentiment as well. 
Black markets occur when there are sudden changes occur. That occurred. We have to admit it. When   the country was closed in April and May, it happened. It created a bit of shock. That black market itself propelled certain exporters to retain their dollars and importers to import quickly.  Both aspects had a negative impact on the rupee and the way people were doing business. After some time, they realized that the situation that was being talked about was not really happening. Then, people began to get back to a calm environment. 

  Q:    Our oil import bill is huge. Does the government contemplate alternate plans to overcome it?

When the oil prices rise in the world market, there has to be some corresponding rise in the local market at filling stations. If that does not happen and the demand continues unabated, we will not be able to sustain the oil situation. That is why certain revisions of prices were needed. Then, we can ensure that there is a reduction in demand and the Ceylon Petroleum Corporation (CPC) does not have mounting losses. That was an important economic decision to some extent.  I am glad that it has been done. We are hoping that we can limit the increase to that level. It looks tough now because the fuel price has spiked to US$ 80 a barrel. 

  Q:    It means you are not in a position to revise prices downward?

At this moment, any downward revision is not possible. If the world market prices come down, we can consider. There is a steep increase in the world market now. That is perhaps because the world is opening up. Then, the demand for fuel is rising. We have to watch this situation quite closely and decide how best we can manage it. 

  Q:    Otherwise, are we looking at new purchasing criteria like government-to- government deals?

That is an option we have to explore – direct purchases. There is concern that unless we take international prices into consideration, we won’t be as transparent as it should be. It is a question of ensuring that the degree of transparency is there, and also, we get the best out of the government to government deal. Those will be the decisions which the relevant Ministry and the CPC would like to examine. We would like to see all these measures leading to cheaper prices. That is what we all are interested in ensuring. 

  Q:    You visited some of the Middle Eastern countries recently, such as Qatar, Oman and the United Arab Emirates. Have those visits yielded any result now?

Yes, I would see a lot of discussions taking place. There may be a few surprises in store for people as well. These discussions could lead to very good outcomes. It is too early to talk about them.  We are hopeful that those visits will prove fruitful. 

  Q:    Recently, Samagi Jana Balawegaya (SJB) MP Patali Champika Ranawaka accused the government of printing money valued more than Rs.800 billion. Is it true?

Yes, it is true.  When you have a major illness, you have to be given some drastic treatment.  It has to be given by the doctor concerned, not by the driver who brought the patient to the hospital concerned.  Doctor knows the side-effects. When side effect surface, you have to administer counter-drugs as well.  Money printing, by itself, can lead to difficulties unless you know at what stage to pull it back. During the financial crisis, the United States increased money printing. Then, they did it again. We have printed money at some stages. It was done when I was the governor. Those who don’t know this subject can be screaming and shouting. Champika is a competent engineer, I am told.  But, I don’t think he has a clue about these things. 
He is going by the drug itself, not knowing its side effects. We know how to manage it. I am happy that he is concerned about it. It means he has studied the first warning in the drug. He does not know that proper doctors can manage it. In future, there will be a time for us to pull it back.  Without inflation occurring in the country, we will be able to gently pull it back and ensure that the situation is different. The important point is that all the countries have done that.  That is one of the drastic drugs we have to administer to the patients suffering as a result of Covid-19. 

"As you know, once our government came into being, we negotiated US$ 1.5 billion swap with China.  We have been successful in getting another swap with Bangladesh- US$ 250 million.  We are getting another swap with India – US$ 400 million. In addition, we are negotiating with India for another swap of US$ 1 billion"

  Q:    Won’t it lead to inflation at the end?

That is the normal theory. That is true if the conditions are normal. Right now, there is a contraction of the economy. It is there all over the world, not in Sri Lanka alone. When there is a contraction, the risk of inflation occurring, as a result of additional printing of money, is much less. There is a contraction of economy. In such a situation, flushing the monetary system with additional currency is not creating it. That is the whole idea.  Once the economy gets back to normalcy, you have to pull it back. 

  Q:     Now you have Basil Rajapaksa as the new Finance Minister. What do you think about him?

What is important for us to realize is finance is a very important function of any government. Having a full time finance minister is very important. Then, he will pay undivided attention to all the financial issues. I am happy that there is a full time finance minister. While admitting that the prime minister did an amazing job during the most difficult him,   I think a full time finance minister will be helpful from now onwards.