Central Bank Governor Dr. Indrajit Coomaraswamy said the global economy had a number of tailwinds for Sri Lanka, while insisting on the need to focus on mitigating the negative impacts of international interest rates.
Addressing the Financial Sector Investment Conference organised by Asia Securities, he asserted that the world economy seemed to be in better shape, providing a better set of external circumstances of tailwinds for Sri Lanka, and considering all the macroeconomic factors, it provides the country with a great opportunity for further economic prosperity.
Dr. Coomaraswamy focused his remarks on a macroeconomic perspective, outlining a favourable external economy, the challenges and opportunities and stressing that Sri Lanka could gather momentum to progress towards a higher growth trajectory in accordance with a carefully designed development agenda. He asserted that Sri Lanka had a great opportunity to take advantage of China’s massive outflow of capital in the next 10-15 years.
“One particular phenomenon that needs to be taken particularly is the fact that China, like Japan in the 1980s, is moving its focus from exports of goods to a laser light focus on the export of capital. It is going to use the Belt and Road Initiative (BRI) to export capital and Sri Lanka is fortunate to be located right in the middle of the Silk Route. The opportunity is there to be taken and we must grasp it,” he added.
With key export markets the US and the European Union now on an upward growth trajectory, Dr. Coomaraswamy said it has positively reflected on Sri Lanka’s past five-month export figures.
“Sri Lanka will be the only country in the world that will have preferential access to China, India and Europe. We are also working on many bilateral trade agreements with India, China and Singapore. The real prize of these trade agreements is to show this preferential access to these markets and our location. These are massive differentiating factors for Sri Lanka to attract investors,” he pointed out.
However, it was pointed out that robust macroeconomic fundamentals were necessary to maintain the momentum of the economy through fiscal consolidation, exchange rate alignment, prudent debt servicing and the introduction of a flexible inflation targeting regime.
“From my understanding there is a general perception that the next US Fed rate cycle will see an increase of 25 basis points (2%) in December, which is much less than in the past,” he emphasised.
As far as institutional investments are concerned, he said due to the buoyancy in advanced countries, their yields have increased significantly and the volume of money therefore coming into the emerging markets from institutional investors may get tempered.
“This makes it even more important for individual countries to make sure their macroeconomic fundamentals are strong, so that they can make sure their share of institutional investors are not affected too much,” he added.
Speaking on long-term debt, Dr. Coomaraswamy expressed caution that the rising cost of sovereign bonds would come under upward pressure as normalisation takes place in the monetary policies of major global economies.
“As we are still a twin deficit economy, we have fairly high premium above the risk of the US. What we need to do is strengthen our macro fundamentals to a point where we drive down that premium. If we are able to drive down that premium, by more than increasing the risk-free rates, then clearly our cost of borrowing will be neutral or come down and that is what we need to do. We need to focus on getting our macro policies even better to drive our premium down,” he explained.
It was pointed out that a new growth model based on the private sector being the locomotive for economic development, with exports and investment, including FDI as key pillars, is being pursued. “Maximising the advantages of our strategic location in the Indian Ocean, diversifying our export basket and enhancing trade facilitation will be imperative in promoting sustained growth and development.”
According to the Governor, changes to governance and institutional structures, regulatory frameworks and procedural fairness will enhance the investment climate, enabling Sri Lanka to stay competitive in the region.
Explaining these frameworks, he said consistency and predictability in policymaking are expected by institutionalising them.
“The Fiscal Responsibility Management Act that we have has no teeth. We need to strengthen it. The bill will provide provisions so that any deviation from the targets made could only be for specified reasons and if you do deviate from the targets then you must chart a clear way back to get through the target,” he added.
Dr. Coomaraswamy also said the introduction of the Liability Management Act would enable the Government to borrow more than the requirement for the Budget of that particular year.
“Currently, the Appropriation Act limits Government borrowing through finance into deficits in the Budget. With the new legislation, we can raise additional resources.”
He stressed that investment promotions were being boosted through taskforces to improve the Ease of Doing Business and create a more effective one-stop shop, while trade facilitation was being strengthened through a single economic window and a trade portal in Customs.
In the context of natural calamities being experienced by the entire world today, Dr. Coomaraswamy said devising a growth framework while disregarding environmental sustainability was highly imprudent. Therefore crisis preparedness and sustainability needed to be embedded in the planning and budgeting process.