We are committed to honoring all debts
Q/ What do you think of the economic crisis in Sri Lanka?
Currently, the country’s economic activity is severely affected by recent adverse developments on the global front, in terms of supply chain disruptions and soaring commodity prices, as well as on the domestic front, particularly under the form of power outages and supply shortages. .
The current shortage of essential items such as fuel and LPG mainly stems from the lack of liquidity in the domestic foreign exchange market in the absence of large foreign exchange inflows. In view of these developments, the Central Bank has announced a comprehensive policy package to counter the economic headwinds the country is currently facing.
Allowing greater exchange rate flexibility is one such measure. As a result of this initiative, the conversion of foreign exchange receipts through formal channels has already shown an increase. We expect these concerted efforts to gradually help ease the temporary pressures posed by current economic challenges.
Despite adverse speculation from some parties and sovereign credit rating downgrades, Sri Lanka has been able to maintain its spotless debt servicing record, including the settlement of $500 million of international sovereign bonds in January 2022. While also providing liquidity support to fund essential import bills, we have been able to service external debt in a timely manner so far. The government and CBSL have also pledged to honor all future debts.
Q/ Has India provided aid?
A/ The India-Sri Lanka relationship is rooted in shared cultural ties, economic partnerships and diplomatic cooperation. Hence, India has been a long-time supporter of Sri Lanka in difficult times. Even in 2020, when Sri Lanka was grappling with the effects of the Covid-19 pandemic, India extended its support by making available the SAARCFINANCE Currency Swap Facility through the Reserve Bank of India. Again in 2022, RBI provided this exchange facility.
In addition, India has agreed to provide a $500 million line of credit to finance the purchase of petroleum products and a $1 billion line of credit to finance essential commodities. These facilities would certainly help improve the availability of essential supplies and control supply-induced price pressures while reducing the pressure resulting from foreign exchange import demand.
Q/ Sri Lanka’s printed currency is worth LKR 1.2 trillion in 2021. Did that help?
A/ In economic terms, there are two main methods by which the CBSL can print new currency (and issue for the economy). For one thing, when the CBSL extends credit to licensed commercial banks or the government, it prints new currency, which is technically called domestic asset accumulation.
On the other hand, when the CBSL purchases foreign currency from the domestic foreign exchange market or from inflows received by the government, it prints new currency, which is technically known as foreign asset accumulation. The total value of these two assets is called reserve currency. The reserve currency would increase if one or both of these assets increased, and vice versa. Money printing is generally thought of as the increase in the stock of reserve money.
The country’s reserve currency grew by only LKR 341.4 billion in 2021. Currency in circulation, which is another alternative definition of money printing and a component of reserve currency, grew by approximately LKR 170.3 billion, in order to meet the growing demand for currency amid the pandemic and to facilitate increased transactions in the economy.
The increase in government funding needs, amid revenue losses due to the pandemic and limited access to international capital markets, compelled CBSL to provide financial support to the government through the purchase of equity securities. ‘State.
Thus, on a net basis, CBSL’s holdings of government securities increased by LKR 691.6 billion in 2021. However, as CBSL sells foreign currency to the government to settle a foreign currency loan or the CBSL provides foreign exchange to the banking system to ensure uninterrupted imports of essential goods, the impact on the monetary base due to the purchases of government securities by the CBSL is canceled and the money available in the economy is reduced by the same amount. As a result, in 2021, CBSL’s net foreign assets decreased by LKR 912.9 billion, offsetting the net increase in CBSL’s holdings of government securities in 2021.
Q/ You recently requested assistance from the IMF.
A/ Potential IMF engagement should support the country’s balance of payments position and policies conducive to greater macroeconomic stability. In the current context, it is necessary to obtain a significant amount of foreign funding immediately. This can be facilitated by IMF engagement while carrying out the necessary political and structural reforms. Working with the IMF would boost investor confidence and encourage non-debt-creating capital inflows. It would also help increase international reserves and put growth on a sustainable path. Formal discussions with the IMF are expected to start shortly.
Q/ Have Sri Lanka’s allies, including China and India, delayed bilateral lines of credit?
A/ No, not at all. On the contrary, the execution of these bilateral lines of credit is progressing very well. India and China have always been trusted bilateral partners and we highly appreciate their continued financial assistance to Sri Lanka not only in difficult times but also throughout these years on our path to sustainable economic growth and inclusive.