Road Map for growth and stability | Daily News

Road Map for growth and stability

Short-term and long-term economic and fiscal governance
President Gotabaya Rajapaksa meets an ADB delegation in Colombo.
President Gotabaya Rajapaksa meets an ADB delegation in Colombo.

The new policy framework to stabilize the financial system and the foreign exchange position envisages a rapid recovery of the economy with stable prices and sound macroeconomic fundamentals. The Central Bank’s six-month Road Map for ensuring macroeconomic and financial system stability is expected to give a fillip to the COVID pandemic-impacted economy in the short term.

Central Bank of Sri Lanka (CBSL) Governor Ajith Nivard Cabraal said the new measures will be the first step in a long journey to bring in greater stability to the economy. Speaking to the media at the Presidential Media Centre (PMC) yesterday (7), he acknowledged that given the magnitude of the COVID pandemic-caused challenges, there was a need for multiple interventions with the burden or the responsibility to be shared by all stakeholders. “In times of stress, we need discipline rather than rocking the boat. If not, we will all capsize. Therefore all stakeholders need to understand their role and responsibility,” he said.

The CBSL will take immediate steps to ensure the stability of the external sector by closely focusing on the near-term horizon, i.e., the next six-month period, the Governor said, adding that the rationale for this short-term focus was that given the forex challenge and debt service concerns, the proper management of the current period would result in clarity and certainty being restored which would enable the economy to rebound.

“The CBSL’s first and urgent priority is to provide clarity with regard to the movement of Sri Lanka’s macroeconomic fundamentals in the desired path and thereby ensure stability in the financial sector,” Governor Cabraal said. His policy package is not limited to the short-term six-month plan. Another plan for one year to consolidate and medium- to long-term initiatives to build cushions to absorb any future shocks have been designed. The CBSL is also formulating long-term economic plans. Once a course of action is decided, it has to be consistently followed, he said. “I will assure all of them that they will not be let down, and the economy will be steered towards continued stability.” 

The CBSL Governor said that the priorities in the short term were focused efforts on macroeconomic and financial system stability that includes near-term measures to ensure continued and timely debt servicing, increasing forex liquidity in the market and creating a framework for all enterprises to recover from the effect of the pandemic. He acknowledged that the weakening of the economy, along with the effect of the COVID-19 pandemic has recently caused anxiety about macroeconomic stability and the sustainability of the Sri Lankan economy. In that context, he also said several key issues around Government debt would need some clear policy responses whilst the Central Bank on its part had also faced challenges in delivering its stability objectives owing to the prevailing difficult economic conditions.

Under the Road Map, the Government will present a business-friendly Budget, improved non-debt inflows and provide active support to raise funds in order to change the debt mix. The CBSL will ensure macroeconomic and financial system stability as demanded in the Monetary Law Act, a stable exchange rate and an interest rate structure.

The Central Bank expects from the banking sector a greater transparency in domestic foreign exchange transactions, new funds and credit lines from abroad, and close cooperation with the Central Bank to ensure export proceeds’ conversion.

Merchandise and service exporters have been urged to avoid adverse speculations on the exchange rate, and remit and convert export proceeds on time in order to ensure growth in export businesses.

Importers have been instructed to curtail non-essential and non-urgent imports. Retailers and wholesalers too have been instructed to avoid hoarding essential imported and local goods and avoid attempting to earn supra-normal profits by raising margins and charging exorbitant prices.

Another appeal was made to the expatriate community of Sri Lankans to increase remittances and non-debt creating inflows.

Cabraal said that by the end of that six-month period, the current efforts to enhance merchandise and services exports’ inflows will also show significant achievements, while a normalisation in tourism cash flows is also likely.

He said that the CBSL Road Map for 2022 will be unveiled in January and it will aim at improving the external debt profile while concentrating on non-debt inflows, deliver the fiscal and external targets, promote a fast recovery in the real economy and improve Sovereign Ratings and the Ease of Doing Business.

The Governor explained to the media that the medium- to long-term goal was to build stable cushions in all macro-fundamentals to absorb any shock, strengthen the domestic production economy, strive for higher growth within a low inflation environment, and ensure the achievement of fiscal and monetary targets.

A single sector would not be overly burdened, but all would need to contribute, Cabraal said and added that the new effort will require the coordinated efforts of all stakeholders of the external sector, with vital, but moderate contributions by each stakeholder. The new policy guidelines will help the required adjustments to take place gradually during the period of transformation of the economy to greater stability and these efforts would also prompt positive actions of international investors and international rating agencies.

Under the Road Map, Sri Lanka is estimated to get nearly US$ 7 billion in foreign inflows between October and December and US$ 11 billion between January and March next year. The foreign exchange inflows include export earnings, workers’ remittances, tourism, new credit lines and forex deposits to the banking sector and net foreign inflow to the Colombo Stock Exchange and the Colombo Port City. Separately US$ 5.1 billion of fresh forex inflows and roll-overs were expected from the Government and Central Bank in October to December and another US$ 6 billion between January and March next year.

On Tuesday (5) Asian Development Bank (ADB) Director General for South Asia Department Kenichi Yokoyama has assured President Gotabaya Rajapaksa that the ADB will support the promotion of Small and Medium Scale Enterprises (SMEs). The ADB provided a US$ 750 million concessional loan last year for projects in Sri Lanka. Yokoyama, who called on President Rajapaksa at the Presidential Secretariat, said that the ADB will take steps to increase that amount to US$ 1 billion next year.

Referring to the need for safeguarding the SMEs, Cabraal said the recovery will be widespread and will include vulnerable groups such as the SME sector, informal businesses and daily wage earners who will effectively engage in economic activities, leading the economy to recover faster in the next six months.

The CBSL Governor, elaborating on the immediate positive impacts, said the Foreign Direct Investments (FDI) pipeline is expected to increase with the Colombo Port City and industrial zones taking off. “Such outcomes will provide a stable foundation for the external sector by the end of the targeted six months.”

Cabraal added that with the success of the vaccination rollout, the gradual opening up of the country under strict adherence to health guidelines was expected to help all sectors to return to normal gradually.

He is confident that the investment climate would gradually improve with the implementation of the new legislation applicable to capital markets and more direct investments were expected with the implementation of the Port City Economic Commission Act and proposed monetization of under-utilized assets.

With the opening of the country, the tourism industry will pick up shortly and the pressure in the external sector will gradually normalize. Tourism Minister Prasanna Ranatunga said the initial target is 5,000 tourists per day and it would gradually increase. This will result in greater stability in the exchange rate and improvements in the current account balance and forex reserves are envisaged.

The CBSL Governor said that having tackled the near-term obstacles, Sri Lanka would be able to progress with greater confidence towards 2022 and beyond. The positive outcomes envisaged by the end of 2022 include normality in economic activity with the COVID-19 pandemic being under control, resulting in a real GDP growth of around six percent. By then the inflation will be stabilised in the middle of the desired four to six percent target range. Other positives are stabilisation of interest rates, revival of tourism to lead to a better business sentiment, higher investment flows, improved macroeconomic fundamentals, resulting in improved Sovereign ratings and stronger and disciplined economy.

Cabraal explained that the Road Map is not a fixed formula. “This is a dynamic plan and we will tweak it, fine-tune it, or even change some parts, as we move on,” he said.

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