- Says growth and investment remains below expectations, debt to GDP ratio has increased
- Points out reserves shored up largely through borrowings
- Multiple policy statements but limited implementation,investor confidence remains low
- FDI earned from pre-2015 projects, Budget deficit targets unmet despite tax hikes
By Charumini de Silva
Presenting a different point of view, former Central Bank Governor Ajith Nivard Cabraal yesterday sought to flip the narrative on Sri Lanka’s macro economy, pointing out that debt had continued to increase during the last three years with growth and investment remaining below expectations.
Cabraal, together with former Securities and Exchange Commission (SEC) Chairman Dr. Nalaka Godahewa, contended that the historic high reserves of $ 9.9 billion reported by the Central Bank last month was mostly made up of borrowings as the Coalition Government had limited success in attracting large-scale foreign investment.
“The ratio of debt to GDP has reversed its favourable downward trend from 2010 to 2014 and instead has risen to 77.6% in 2017 from 71.3% in 2014,” he said, adding, “Although a significant increase has been seen in government debt, there seems to be very few infrastructure additions or improvements visible.
Repayments are bound to become more and more challenging in this environment.”
“Total external debt as a percentage of GDP has risen from 53.6% in 2014 to 59.5% in 2017. Foreign investments in Government Securities have been at levels well below the end-2014 levels. Outstanding stock of International Sovereign Bonds has increased to $ 9.65 billion by end-2017,” he added.
He also highlighted that the growth rate of 3.1% recorded last year was the second lowest in 28 years, and the lowest since 2001.
The former officials also noted that the $ 1.9 billion in Foreign Direct Investment (FDI) shown by the Government was mostly earned through the long-term lease of the Hambantota habour, which was constructed during the tenure of former President Mahinda Rajapaksa, with significant big budget projects since 2015 being absent.
“No significant new projects have been added to the pipeline in the three years, 2015 to 2018,” he said.
Dr. Godahewa also highlighted the lack of a streamlined economic policy by the Government, which he claimed has dampened investor confidence.
He pointed out that multiple policy statements released by the Government, with one more to be presented by President Maithripala Sirisena on 8 May, had seen limited implementation with policy inconsistency hobbling economic development.
Cabraal also slammed the current flexible exchange rate policy insisting that it was leading to increased cost of living and stressed that the Central Bank has a “statutory duty” to maintain economic and price stability by intervening in the currency market.
He also rejected explanations provided by National Policies and Economic Affairs State Minister Dr. Harsha de Silva that a competitive rupee would be beneficial for Sri Lanka’s exports, describing him as the “self-proclaimed Economic Guru.”
“In any event, I now firmly believe that it is not possible to convince or attempt to convince these so-called experts, and that is why I decided to apprise the public of the current situation and warn them about the impending dangers,” he said.
Cabraal also censured the Government for missing the 2017 Budget deficit target despite increasing revenue by raising taxes and questioned how the Government was serving the people by subjecting consumers to high levels of taxation.
Harsha defends Govt. policies
- Insists Govt. macroeconomic management positive, refers to 2012 rupee depreciation
- Says significant investor interest for Hambantota from multiple sectors
- Govt. managing debt responsibly
National Policies and Economic Affairs State Minister Dr. Harsha de Silva, despite yesterday agreeing with former Central Bank Governor Ajith Nivard Cabraal that several Foreign Direct Investment (FDI) projects were signed by the previous administration, insisted that a sizable number of new projects would soon be launched and contended that the Government had improved macroeconomic stability. “His claim is accepted; there is no issue about it because that is the normal practice. We are not so cheap to say otherwise. An investment doesn’t take off the ground just by signing an agreement. It requires time to be implemented. What we sign now will also continue, but that’s how we build investor confidence,” he told the Daily FT.
The Minister reiterated that the Hambantota port was an asset that drained a massive amount of public money without giving any returns, which the new Government had changed into a viable joint venture that will attract new investments.Dr. de Silva insisted considerable interest had been forthcoming from foreign investors in sectors such as tourism, real estate, healthcare, education and ICT for the Colombo Port City project. Therefore, even post-2020, investments will still continue to flow into Sri Lanka.
“We have moved away from the debt model to an FDI model,” Dr.de Silva pointed out.
The State Minister asserted that debt repayments by the Government would be for large commercial borrowings from 2007.
“The outstanding payment of $ 15 billion from 2019-2022 is a massive headache. These are some sour grapes, but we as a responsible government are actively managing that liability,” he stressed.
He also noted that this was one of the reasons for bringing in the Liability Management Act to pay back some of the previous regime’s borrowings.
The State Minister said the biggest rupee depreciation was recorded in 2012, when the Central Bank burnt $ 4.3 billion to defend the currency at Rs. 112, which went up to Rs. 132.50, depreciating by 15% in a matter weeks and pushing the country into a balance of payments crisis.
“That was the lack of management that these people who talk today had. Forgetting all of that and trying to accuse us is laughable,” said Dr. de Silva.
Cabraal claims Govt. short on public goodwill for fuel pricing formula
- Says Govt. lost opportunity to implement transparent price formula in 2015 when global prices were low
Former Central Bank Governor Ajith Nivard Cabraal yesterday said the Government lost out on a chance to implement a transparent fuel pricing formula in 2015 when global prices were lower and was now struggling to raise prices through a transfer system as it risks public ire through an outright increase.
“This Government is very good at hiding. They want to increase the price but they want to hide behind the formula. If the Government wishes to increase the price of petroleum, they can do it now and they do not need a pricing formula,” he told reporters in Colombo.
The Government committed itself under the structural benchmarks of the $ 1.5 billion International Monetary Fund (IMF) Extended Fund Facility (EFF) to introduce a pricing formula for fuel by the end of last month. However, the formula is still being hashed out by the Treasury and the Ceylon Petroleum Corporation (CPC).
Cabraal questioned as to why the Government did not consider implementing a pricing formula when oil prices were lower or before the Central Bank decided to follow a flexible exchange rate policy.
He pointed out that the Government was struggling to get the public to buy into a price increase in fuel as increased taxes and slow growth had hampered the ability of the public to absorb increases in the cost of living.
“They can’t absorb costs for too long and now it is a matter of time before they have to make an increase. The Government doesn’t have the goodwill to take the decision. The Government is so close to being checkmated by the IMF and there is nothing we can do about it,” Cabraal stressed.
Referring to recently released Central Bank Annual Report statistics, Cabraal said the Ceylon Petroleum Cooperation (CPC), which made a Rs. 45 billion profit in 2016, has only made a profit of Rs. 5 billion in 2017. In addition, the Ceylon Electricity Board (CEB) also made losses of Rs. 45 billion last year.
“The rupee depreciation and increased oil prices are now biting these institutions. In 2018, I am sure they are going to make losses,” he added.