Indrajit Coomaraswamy, Governor, Central Bank of Sri Lanka: Interview

Interview: Indrajit Coomaraswamy

How will the Active Liability Management Act affect the country’s public debt?

INDRAJIT COOMARASWAMY: In the past, government borrowing for any given year was limited to the cash flow requirement specified in the Appropriation Act. However, the Active Liability Management Act of 2018 provides for additional borrowing to build buffers specifically for the purpose of liability management. This provides greater flexibility, with rollover risks being mitigated as the maturity and cost structure of Sri Lanka’s debt obligations are no longer fixed.

What opportunities are there to strengthen sustainable growth and diversify state financing?

COOMARASWAMY: Institutionalising frameworks for macroeconomic policy will assist Sri Lanka in breaking out of the cycle that it has been caught in for many years. If you have a market of 22m people with an average annual household purchasing power of around $4000, external demand has to be a key part of the growth strategy. If you look at high-performing economies, particularly over the last 30-40 years, exports and foreign direct investment (FDI) have been the key areas where you need transformation to sustain high levels of growth on a medium- to long-term basis. In addition, there is no fiscal space for the state to be the driver of development; we therefore need the private sector to play a significant role in stimulating the economy.

The country is also in the process of establishing a number of trade agreements. These deals potentially hold a great deal of promise for investors. The first is an agreement with Singapore, which seeks to provide security and confidence to Singaporean investors in Sri Lanka. We already have a bilateral goods agreement with India, and an effort is being made to address some of the non-tariff barriers and extend the deal to include services and investment, while also supporting technology transfer and training through a broader cooperation agreement. Meanwhile, talks are ongoing with China to establish a similar deal. If all these agreements came into effect, Sri Lanka would be the only country in the world with preferential access to the Chinese, Indian and EU markets – the latter under the Generalised System of Preferences Plus.

Regarding financing instruments, our borrowing has traditionally come from multilateral organisations such as the World Bank and Asian Development Bank, and bilateral donors, but, we have also issued several international, dollar-denominated sovereign bonds and syndicated loans. We are now looking at instruments such as sukuk (Islamic bonds), along with yen- and renminbi-denominated bonds to diversify our investor base, but price will be the determining factor. Longer tenors are required due to the bunching of repayments over the next few years.

What steps are required to reduce the country’s current account deficit?

COOMARASWAMY: Two areas which have been of particular concern are gold and motor vehicle imports. In order to address these issues, in April 2018 a 15% levy on gold was introduced to eliminate an arbitrage opportunity that encouraged smuggling to India. In addition, the duty was increased, and the central bank introduced macro-prudential measures to curtail motor vehicle imports. Statistics for November and December 2018 indicate that greater balance has been achieved in the current account of the balance of payments. The depreciation of the exchange rate should also contribute to lowering the deficit. Through a mixture of exchange rate adjustment, macro-prudential measures and duty changes, we have addressed the pressures in the trade account. At the same time, we need to maintain the momentum gained in 2017 and 2018, when record export and FDI figures were achieved.