The Central Bank recently presented a spirited defence of its money printing and insisted that it had performed its duty to provide liquidity at a time when the entire country was struggling from the COVID-19 impact, and expressed confidence that it would not result in inflationary pressures and currency depreciation.
Participating in a panel discussion titled ‘State of the Sri Lankan economy as reflected in the Central Bank Annual Report 2019’, top officials of the institution contended that even though growth was likely to contract in the second quarter, they were confident it would pick up in the second half due to lower interest rates and pent-up demand. They were also of the view that the economy would perform well in the fourth quarter assisted by the recovery of the global economy.
The Central Bank insisted that it was confident Sri Lanka will grow by 1.5% in 2020 despite the COVID-19 impact.
The virus would have mixed outcomes for the economy with falling oil prices expected to save as much as $ 2 billion from the fuel bill and limited tourism would also see lower imports. But the current account deficit is expected to worsen with a larger Budget deficit likely for this year, though both are projected to improve from 2021 onwards.
Central Bank Governor Prof. W.D. Lakshman speaking during the webinar opined that even though Sri Lanka had aspired to double digit growth in the past, it had only managed to achieve that goal about five times in post-Independence history. He argued that given Sri Lanka’s socialist democratic principles it made more sense to aim for 6%-7% growth rather than blindly following China or East Asian countries and targeting higher growth only to see it recede to lower growth after a few years.
“Bangladesh, India and other countries in South Asia have achieved growth better than us so we have been compelled to say that our performance needs to be better. I think we are presently going through a very difficult time.
“During this year growth rates do not look very good. International agencies predict very low, or negative growth rates this year but I have confidence in the system and the impact of policies being taken as well as gradual recovery from COVID-19. There will be greater confidence entering into the system once the curfew eases, which will be contrary to predictions by IMF and other organisations,” he said.
“Our dominant social policies and paradigms have gone through a difficult period and have been hampered by local and international challenges, including the Easter Sunday attacks. We should expect as COVID-19 impact wanes we will be getting back into whatever is normal or ‘new normal’. Let us hope that we will achieve greater success in not just growth but also sharing growth results.”
Central Bank officials were also of the view that debt repayment was under control and sufficient buffers had been built to repay debt for the first 10 months of this year. Senior Deputy Governor Dr. Nandalal Weerasinghe said that of the $ 4.8 billion due to be repaid this year, the Government had already settled $ 1.6 billion. To pay the remaining $ 3.2 billion the Government is pursuing several avenues including a swap arrangement with the reserve bank of India, which could be as much as $ 1 billion.
“The Government is in the process of discussing external financing plans. Going forward emerging and frontier markets will not have access to international capital markets in the near future. So there are negotiations to have different facilities in place. The Central Bank has been discussing with the Reserve Bank of India for $ 1 billion and therefore we are confident we will be able to meet repayments.
“In 2021 we will have access to international financial markets and can raise more funds to meet debt repayments. We have already assured investors that all payments will be met and we will maintain that going forward.”
Dr. Weerasinghe also argued that the Central Bank had simply fulfilled its primary duty in buying Government securities during the past few weeks to infuse more liquidity into the system and pointed out that the impact of COVID-19 could have been worse if not for the monetary authority’s intervention.
“The role of Central Banks, especially in the extraordinary circumstances surrounding us is to provide sufficient liquidity to the financial system and allow people to have cash in hand during the lockdown. Our responsibility is to provide sufficient liquidity. If we had not done that imagine the situation? Banks would not be able to smoothen out the virus impact, support businesses and people would not have cash in hand. This is not just something we have done but central banks around the world,” he said.
The Senior Deputy Governor defended the liquidity injections pointing out that governments of both developing and developed countries were providing stimulus of 10%-15% of their GDP. Dr. Weerasinghe also emphasised that the Central Bank will control the impact of money printing through monetary policy, which has taken a more accommodative stance in the past few months.
Since the start of the year the Central Bank has slashed interest four times and in its latest decision warned banks to reduce market lending rates to reflect the decline in 150 basis points or risk punitive action.
“Our monetary policy stance will tackle inflation. Demand is low, there is no excess demand in the market, inflation is moderating and it is well anchored and we will be able to maintain inflation between 4%-6%. Our growth will be well below potential so we will not see any adverse impacts of providing liquidity to the market.
“It is important for the general public to understand that this is our duty. If there is excess liquidity it can exert pressure on the currency but that has not been the case. The currency has been appreciating and our interference has been minimal and there is no pressure on the balance of payments,” Dr. Weerasinghe added.
(FT)