The head of the Central Bank is confident that all debt obligations will be honored

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  • Governor of the Central Bank Prof. WD Lakshman affirms government’s commitment and ability to honor all debts
  • Sri Lanka will mobilize domestic financing to meet investment needs
  • Measures to increase foreign exchange inflows and limit outflows will continue
  • Low interest rate regime and sustainable monetary expansion under current conditions of suppressed demand and absence of inflationary pressures
  • Doomsday predictions prompted by upcoming HRC session on Sri Lanka
  • Key insights from the Veemansa Initiative discussion on “The Foreign Debt Situation in Sri Lanka: Are We Heading for Resolution or Crisis?”

Governor of the Central Bank Prof. W.D. Lakshman

Last week, Central Bank Governor Prof. WD Lakshman expressed confidence that all of Sri Lanka’s debt obligations will be honoured. He made the remark during the inaugural webinar of the Veemansa Initiative, a

new think tank on policy development and advocacy on the external debt situation in Sri Lanka.

It highlighted several challenges facing the country’s economy and concluded with valuable policy responses from experts and participants.

Delivering the keynote address on the theme “External Debt Situation in Sri Lanka: Our Path to Resolution”, the Central Bank Governor said that despite the COVID-19 pandemic and its impact, Sri Lanka will maintain its spotless record on debt servicing. Here is the key point of the Governor’s speech.

“The COVID-19 pandemic and its large-scale impacts have forced the country to rethink its economic strategies.

In the past, we have borrowed from multilaterals, initially on concessional terms, and over time our external debt has grown slowly but steadily. As Sri Lanka became a middle-income country, it became less eligible for concessional financing and had to resort increasingly to commercial borrowing to finance its investments as well as to meet its consumption imports and debt obligations. debt servicing.

He said: “The government has decided that reliance on foreign borrowing, especially commercial borrowing, should be phased out in order to reduce the debt service burden. The government is of the view that the country’s development projects should be, as far as possible, country-oriented, both in terms of the actors involved and the sources of funding. The medium-term objective is to reduce Sri Lanka’s foreign-to-domestic public debt ratio to 33:67 from the current 43:57. Although this could have been done in the second half of the last decade, the volume of external debt fell from $24.6 billion in 2015 to $34.7 billion in 2020.

“This will undoubtedly require some austerity in terms of reducing imports of non-essential consumer goods and improving all forms of foreign exchange inflows. As a result of these measures, it is estimated that the current account deficit of the balance of payments (BOP) in 2020 has reduced to 1 billion dollars against 1.8 billion dollars in 2019. This trend will strengthen further in 2021, and the objective is to achieve a current account surplus in 2021. These current account inflows will be supplemented by capital account FDI.The port city of Colombo and the Hambantota industrial zone are expected to be the main contributors of FDI.

Professor WD Lakshman further stated: “The need to adopt such policies has become very important in the current conditions of global financial markets following the outbreak of the COVID-19 pandemic. Particularly for Sri Lanka, external financing prospects have been constrained by risk aversion and volatility in global financial markets

“Although it is desirable to stabilize the level of prices, the interest rate and the exchange rate at a politically stable and economically feasible level, when conflicts arise over these objectives, the necessary compromises must be worked out. Production Sri Lanka’s economy remains below potential and demand-driven inflationary pressures remain weak in the aftermath of the pandemic There is room for monetary expansion within reasonable limits to meet government spending to meet the social protection needs related to COVID-19 as well as capital expenditure Limits here are dictated by domestic inflation and changes in the position of external reserves Empirical research conducted in a number of countries, including Sri Lanka, failed to establish a direct relationship between changes in the money supply and the price level.

“Despite these challenges and the adverse predictions of many parties who have projected doomsday scenarios, the Central Bank affirms to all foreign stakeholders that Sri Lanka remains committed to honoring its debt obligations, as it has done from impeccably in the past, and that it has the capacity to do so in the future. Of the approximately $3.7 billion to be repaid in external debt in 2021, we have already paid a considerable part of it over the course of of the first two months of the year,” the governor said.

The Governor also indicated that the gloomy and catastrophic predictions appear to have coincided with the sessions of the United Nations Human Rights Council (UNHRC), where a resolution is to be proposed against Sri Lanka by a group of Western countries. The Governor presented a number of measures that the government and the Central Bank have taken to increase non-debt bearing foreign exchange reserves.

The Governor’s keynote address was followed by a discussion among a panel of eminent experts, including Prof. Sirimal Abeyratne – Head of Department of Economics, University of Colombo; Sumanasiri Liyanage – Senior Academic, formerly of Peradeniya University and Sanasa Campus; Dr. Nishan de Mel – Head of Verite Research, a renowned think tank; and Dr. Ravi Liyanage – Chairman, Raigama Group.

The experts also discussed the need to create an enabling environment for investment through tax reforms as well as legislative reforms, thus making Sri Lanka a promising destination for investment, both domestic and foreign. Panelists agreed that keeping interest rates low is conducive to post-COVID -19 economic recovery. In this context, one speaker suggested a more gradual and gradual approach to moving from external financing of public debt to predominantly domestic financing.

More than 150 participants from Australia, China, India, the Philippines, the United States, etc., joined online, sharing their experiences on a range of issues such as import substitution, the gap budget, debt obligation for this year, non-debt finance measures, and more.

Veemansa Initiative has arranged to make the recorded session available on its website: veemansa.org


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