Economic

In view of the need to avoid excess volatility in the foreign exchange market and the impact on banks  risk management, licensed commercial banks have been directed to refrain from  entering into forward contracts of foreign exchange for a period of three months with immediate effect.

Sri Lanka’s economic growth is likely to ‘strongly rebound’ in 2021 to around 5 to 6 per cent even amidst the Covid-19 pandemic-related disruptions continuing to take a toll on the island nation’s fragile economy, Central Bank Governor Prof. W.D. Lakshman said.

Sri Lanka is facing foreign reserve depletion with the repayment of USD 400 billion currency swap with India and no sign of impending foreign funding, eminent economic experts claimed.

By Umesh Muramudali

Sri Lanka’s foreign debt troubles are not new and have often been juxtaposed with concerns over defaulting debt and Chinese debt trap controversies.

Without considering the dwindling the foreign reserves of the country, Sri Lanka has settled its currency swap facility with the Reserve Bank of India (RBI) as scheduled, the Central Bank of Sri Lanka (CBSL) announced today (05).

This was mainly attributable to the increases observed in production, new orders, employment, and stock of purchase in the manufacturing sector while services also continued to recover led by the expansions observed in new businesses, business activities, backlogs of work and expectations for activity.

The Purchasing Managers Index compiled by the Central Bank showed that the employment sub sector has also increased during the month of December 2020.

Some respondents in the manufacture of food and beverages, textiles and wearing apparel sectors highlighted that they could better utilise employees amidst improved factory operations with increased demand.

The Stock of Purchases sub-index increased significantly in line with the expansion in New Orders and Production, as well as with the intended accumulation of stocks anticipating supply chain disruptions in coming months, particularly due to upcoming Chinese New Year holidays.

Many manufacturers mentioned that their shipments were rescheduled, causing considerable delays in arrival/clearance of required materials, mainly due to the continuous delays at the Port of Colombo.

Expectations for manufacturing activities in the next three months improved further with the expectation for the normalisation of economic activities within the country as well as in major export markets.

Business activities in the services sector increased in December 2020 after declining for two consecutive months.

Further, business activities in transportation, and wholesale and retail trade sub-sectors expanded owing to relaxation of travel restrictions to some extent during December 2020.

Moreover, financial services and other personal services sub-sectors also experienced an increase in activities in December 2020.

The Vote on Account, passed in October last year, allows the government only to borrow up to LKR 720 billion during this period. However, Verite Research said that the government has borrowed up to LKR 841 billion between January and April last year.

In terms of the Fiscal Management (Responsibility) Act, No.3 of 2003 as amended by the Fiscal Management (Responsibility) (Amendment) Act, No.15 of 2013, the maximum value of liability as at the end of a particular year shall not exceed 80% of the estimated Gross Domestic Product.

According to financial statements of the government presented to audit, the said restrictions had been complied with.

However, in auditing the financial statements of the year 2019, taking into consideration the liabilities of LKR 1,035 billion as foreign borrowings, treasury bonds and liabilities relating to various public enterprises which had been accounted outside the statement of financial position.

The Central Bank advances and bank overdrafts, the total liability of the Government had been LKR 13,493 billion audit inspection revealed.

It had represented 86.49% of the Gross Domestic Product of the year 2019. As such, the maximum restriction of liabilities cited in the Fiscal Management (Responsibility) Act had been exceeded.

In comparison to the total public debt with the mid year population, the per capita debt was LKR 264,824 as at 31 December 2012 and it had increased up to LKR 558,999 by 31 December 2019.

Moreover, as compared with the per capita debt of LKR 520,364 as at 31 December 2018, it had increased by LKR 38,635 representing 7.42%.

Meanwhile, the per capita debt was LKR 264,824 as at 31 December 2012 and it had increased up to LKR 558,999 by 31 December 2019 in comparison to the total public debt with the mid-year population.

The Fund stands ready to discuss all options of engagement with Sri Lanka, including financial support, if requested by the authorities. The preconditions for financial support are the same as for any other member, Masahiro Nozaki, IMF mission chief for Sri Lanka said.

In an email response to a request for comments on the present stand of the IMF, he noted that they continue to engage with the Sri Lankan authorities and are considering the full set of options for engagement.

The continuation of the EFF policy reform programme will increase the prospects of improving the sovereign rating, a senior economist who has in-depth knowledge in dealing with the IMF in the past  added. He added that in this case, a successful restructuring would be difficult and costly.

He pointed out that the government will be compelled to engage with the IMF to execute the restructuring. If no new IMF and private sector credit comes in, gross reserves would fall to about USD 3.7 billion by the end of 2021, he predicted.

The USD 1.5 billion EFF arrangement approved in 2016 expired on June 2, 2020. Given that the final review under the arrangement was not completed, Sri Lanka could not avail of the last disbursement under the EFF, amounting to SDR 118.550 million equivalent to around USD 200 million.

Disbursements under any Fund arrangement can only be made during the period between the date of its approval by the IMF Board and its expiration date, IMF mission chief Masahiro Nozaki said.

Therefore at this point, for Sri Lanka to access any additional Fund resources, the IMF Board approval of a new arrangement would be needed, he disclosed.

In April 2020, IMF received a request from the Sri Lankan authorities for emergency financial support under the Rapid Financing Instrument (RFI).

Assessing relevant conditions for the RFI has taken longer than for other countries, due to Sri Lanka’s daunting economic challenges, high public debt, and Parliamentary elections in August. The RFI request remains in place, Mr. Nozaki pointed out.

“We have sought but not reached understanding yet on how to fulfill key requirements for the RFI, which include policies to continue ensuring debt sustainability”, he said.

"The authorities have a range of options to ensure debt sustainability and the IMF stands ready to discuss all options with the authorities," he assured.