Central Bank Roadmap: Not Everyone Talking About Action?


By Imesh Ranasinghe

The Central Bank of Sri Lanka (CBSL) recorded negative net foreign assets of $ 780 million in September 2021. Following this, in October, a six-month roadmap for CBSL was presented by new Governor Ajith. Nivard Cabraal, where several proposals have been put forward to resolve the country’s debt and currency problem.

These proposals included organizing high-level discussions with the respective governments to secure short- and medium-term G2G funding to support inflows. This measure had a short-term goal of $ 1 billion with $ 500 million expected in three months. Other proposals included the publication of the regulations of the Port City Commission to attract FDI to the port of Colombo, the facilitation of entries and the implementation of the tax amnesty through the budget law targeting 100 million dollars, and monetization of selected non-core and underutilized assets targeting $ 1 billion.

In addition, the proposals included negotiating short-term currency swaps with international counterparts targeting $ 1.5 billion, facilitating inflows of non-debt-creating currencies, and issuing instructions to exporters to convert. export products after clearing authorized debits targeting inflows of about $ 0.5 billion per month.

However, following the release of the roadmap, Fitch Ratings said the CBSL plan did not provide details regarding the sources as well as the timing of these financial deployments.

Based on the fact that the foreign exchange reserve failed to earn significant dollars for its collection, CBSL’s net foreign assets are expected to have passed the $ 2 billion mark.

The roadmap has so far failed to provide a meaningful solution to the foreign exchange problem, as a month and a half has already passed.

Has he ever failed?

Speaking to us, former Ceylon Chamber of Commerce (CCC) chairman Chandra Jayaratne said the six-month roadmap launched by CBSL should have focused on securing a deal acceptable by a rating agency with Sri Lanka, with the aim of enabling the country national rating to a level which will allow it to borrow or provide lenders with money.

“We have been placed in a negative range in the last three downgrades by international rating agencies,” he said.

He said Sri Lanka is in a situation where the country must at least return to the position that allows it to go to the market.

“Whether we go to the market or whether the market honors us is another question, but at least the market has to recognize us as a country that can come into the commercial debt market and borrow,” Jayaratne said.

After following this path, he said the country should stabilize itself and take a firm stand where international lenders will have confidence in our ability to settle debt and gain credibility, which can only be achieved through a program. of the International Monetary Fund (IMF).

Jayaratne said that although the IMF money cannot be used for any settlement, the IMF program will give money to build up foreign exchange reserves, which will put Sri Lanka in a position to signal to the market that it there is a credible program.

However, he noted that if Sri Lanka decides to go for an IMF bailout, the IMF will first conduct a debt sustainability analysis to ensure satisfactory terms from the country: cannot show that, ”he added.

Finally, Jayaratne said Sri Lanka can restructure its external debt with the best assistance from the IMF and other technical partners.

“We have to follow the Equator Principle; where they pushed back the loans and got a moratorium, ”he said.

In August 2020, Ecuador spoke to bondholders about the $ 17.4 billion debt restructuring; asked the Development Bank of China for a one-year amnesty on principal repayments while seeking new loans from Chinese banks; and renegotiated the terms of bonds issued by the state-owned oil company Petroamazonas.

As part of the Ecuadorian restructuring, about 98.5% of the remaining amount was exchanged for three new bonds totaling $ 15.5634 billion, a reduction of about $ 1.5 billion.

“This is the only way for this country to move forward,” Jayaratne said, adding that day-to-day survival by borrowing short-term swaps thanks to the goodwill of some partners like the China, on which we have become too dependent, is not going to work. Rather, we need a long-term plan.

He added that the CBSL roadmap presented a band-aid to problems rather than real solutions.

The former CCC chairman said that despite the finance ministry’s claim that the 2022 budget will show food prices reduced, the steps the country will take regarding production and how to resolve the forex crisis, not a single word of the budget had not really mentioned how they were going to undertake these tasks.

He said that neither the CBSL roadmap nor the budget provided anything that would gain the confidence of international markets, and that they failed to bring credibility and sustainability to debts.

Commenting on CBSL’s recent directive to exporters to convert their foreign exchange earnings into rupees, he said this was another short-term plan to meet needs, but not a long-term plan that will provide a solution to the forex crisis.

“To get out of this crisis, we need foreign exchange, export revenues, FDI, and we need value-added technology partnerships and marketing partnerships. So in order to do that, people are looking for two or three things like global conventions, human rights and other things that need to be respected, although it seems unlikely. Second, we want credibility in a form of debt sustainability, ”he added.

Open University of Sri Lanka emeritus professor of economics and former central banker Prof Sirimevan Colombage said the CBSL roadmap failed to address fundamental issues related to the forex crisis.

He noted that he instead plans to alleviate balance of payments (BOP) problems primarily through inflows of non-debt currencies such as swaps, government-to-government borrowing, monetization of assets under -used, the rules for converting export earnings, monitoring foreign currency inflows, attracting foreign investment to the government, and keeping the US dollar between Rs. 199 and Rs. 203 over the next three month.

“Such short-term policy measures do not solve the serious balance of payments problem and the debt crisis. These are mostly short-term solutions. They have an anti-export bias since the CBSL forces exporters to convert their currency at an unrealistic exchange rate, ”he said.

In addition, Colombage pointed out that with the announcement of the roadmap, the BOP problem worsened, resulting in a severe shortage of foreign exchange. This reflects the ineffectiveness of the plan.

The economists said that the CBSL should have adopted certain measures such as a medium-term macroeconomic policy framework with coherent budgetary and monetary policies aimed at price stability and the balance of the balance of payments, a system of exchange rates. flexible exchange rate and a fixed exchange rate system that discourages exports and encourages imports. .

In addition, he said the CBSL should have allowed interest rates to be determined by market forces, instead of the interest rate caps currently in place, and insisted the government should s ‘address to the IMF.

In addition, he said CBSL should be independent from political pressure.

About three years ago, the previous government drafted a new central bank law to make CBSL an independent body and allow it to conduct an “inflation-targeting monetary policy”, but abandoned it by the following.

Commenting on the budget, Colombage said he had no medium-term policy framework aimed at deficit reduction or debt sustainability.

Is it too late for the IMF?

At the weekly Cabinet briefing last Tuesday (16), Co-Cabinet spokesperson Udaya Gammanpila said the Cabinet discussed the possibility of requesting an IMF bailout to resolve the current debt crisis. and forex.

Commenting on this, Colombage said it may be too late now for Sri Lanka to approach the IMF as it will take at least 18 months to implement the program.

“But the next 18 months are the most difficult for us, it is too late for ISB payments in January and July,” he said.

However, says Colombage, even if it’s too late, it’s better to be late than never.

He said there are many advantages to having a program with the IMF, even though the IMF’s loan aid would be too small to resolve the debt crisis.

The purpose of IMF assistance is to resolve the balance of payments problem. It offers a respite to the debt-ridden country to improve macroeconomic stability through structural adjustments and thus boost the confidence of foreign investors.

Colombage added that in the absence of such a program, the debt situation will worsen.

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