By Jackie Horne and Elliot Wilson
Sri Lanka has the right strategic plans in place to take its economy to the next level, but the challenge is whether they can be executed effectively, the country’s central bank governor Indrajit Coomaraswamy told GlobalMarkets yesterday.
“That’s our challenge and the jury’s still out,” he said. “But our economy has enough assets to make that leap forward if we can achieve it.”
Coomaraswamy said Sri Lanka had historically never got its macro-economic framework right either: a problem he is determined to fix.
The country is one year into a three-year Extended Fund Facility (EFF) from the International Monetary Fund (IMF), having hit a balance of payments crisis as a result of the previous government’s heavy reliance on Chinese funding for infrastructure projects that did not generate an economic return.
To keep future officials in check, the central bank wants to institutionalise Sri Lanka’s macro-economic framework by adding “some teeth” to the country’s Fiscal Management Responsibility Act.
“The act has budget deficit and debt-to-GDP targets, but no one takes them seriously,” Coomaraswamy said. “We want it to stipulate specific reasons why a target might be exceeded and a clear plan to bring it back again.”
The governor said politicians were not keen on the idea, but the central bank had the prime minister’s support and was, therefore, confident parliament would pass it.
The IMF programme calls for a budget deficit of 3.5% by 2020. Coomaraswamy said the 2017 figure was likely to come in around the 5.2% level, having slipped slightly because of droughts and flooding earlier this year.
But he is confident of meeting the 2020 target given appreciable progress the government has made improving tax collection rates from 11% to a projected 14% of GDP this year. He expects this to improve further to 16.5% by 2020 after parliament passes a new income tax bill.
Coomaraswamy also said Sri Lanka had done a good job rebuilding its foreign exchange reserves to $7.2bn, or 4.5 months of import coverage. And he added that the figure did not yet include money the government will receive from selling a lease for its Hambantota port to China.
He argued that if Sri Lanka can maintain its current macroeconomic path, its financing rates should not be affected by rising US interest rates. The country does not have any international bonds maturing in 2018 and the central bank intends to use the breathing space to improve its debt maturity profile.
“Next year, we won’t just finance the budget deficit in the international bond markets, but also engage in a liability management exercise to lengthen our yield curve,” he concluded. “We’re currently removing our borrowing cap so we can engage in buybacks and refinancing.”