Central Bank Governor Ajith Nivard Cabraal said the economy would grow by around 6% next year following a rebound in the tourism sector, boosting foreign currency inflows into the country.
At the press conference on the monetary policy stance last week, Cabraal said there was no need to ask for an IMF bailout if the debt restructuring was done in a scientific way. The old regime opted for a program with the global lender, as the value of international sovereign bonds (ISBs) rose from around $ 6.9 billion in 2010 to around $ 18 billion at the end of 2019, Cabraal said. The IMF will want us to depreciate the rupee, reduce the number of civil servants, cut pensions, sell state land and cut subsidies if we ask for its help, he said. Citing projections for tourism in Sri Lanka, Cabraal said a 10 percent growth in arrivals is expected every month next year, which would be a major boost for the industry and the economy.
The industry registered 29,000 visitors in the first three weeks of this month and around 89,000 through November of this year. Focusing on foreign remittances from expatriate workers, Cabraal said about 230,000 Lankans go abroad for work each year and added that the numbers would rise with the relaxation of travel restrictions and the reinstatement of the economy. normality in countries.
“We have encouraged remittances through appropriate channels by giving incentives such as Rs. 2 for every dollar converted into rupees,” Cabraal said, adding that exporters who had reservations about converting export earnings into rupees understood the rationale for the rule.
Allaying fears of default, Cabraal said allowances for the repayment of external loans had already been made and added that negotiations are underway with central banks and governments for swap deals. Foreign exchange reserves, which had fallen to US $ 2 billion in September, are expected to reach US $ 3.5 billion by the end of the year according to the central bank.
However, economists and think tanks have cautioned lawmakers about the need to shore up the reserve base given the amount of loan repayments to come over the next four years.
The economy rebounded strongly in the first half of this year, supported by fiscal and monetary stimulus, the central bank said.
The re-emergence of the pandemic and the resulting disruptions in production appear to have affected the recovery underway in the third quarter of this year somewhat.
However, the available high frequency indicators suggest that economic activity is rapidly returning to normal.
The removal of the Covid-related lockdown measures in October and the successful rollout of the vaccine nationwide would help activity in the coming period.
While real GDP growth is forecast at around 5% this year, the continued rise in Covid infections globally and nationally could impact that expectation to some extent.
The external sector remains resilient in the face of strong headwinds, with merchandise export earnings remaining robust, registering more than $ 1 billion for the fourth consecutive month in September 2021.
Preliminary data shows that merchandise exports hit a record high in October 2021.
Import spending has also increased, widening the trade deficit in the nine months ending September 2021 compared to the corresponding period the previous year. The tourism sector has shown strong signs of recovery with the easing of restrictions.
Despite moderate inflows due to workers’ remittances in recent months, a rebound is expected in the coming period with the continued increase in worker migration and efforts to facilitate the flow of funds through formal channels. The depreciation of the Sri Lankan rupee against the US dollar is so far recorded at 7.2% in 2021.
The exchange rate has remained stable at around Rs200-203 against the US dollar for the past three months. At the same time, gross official reserves were estimated at US $ 2.3 billion at the end of October 2021. However, this does not include the bilateral currency swap facility with the People’s Bank of China (PBoC) of 10 billion. of CNY (equivalent to approximately US $ 1.5 billion).
Measures taken by the government and the Central Bank to attract new foreign currency inflows and expected inflows into the private sector, including the financial sector, are expected to increase gross official reserves, thereby strengthening the external sector in the coming period.
Concretely, a greater conversion of export earnings is observed, while negotiations with foreign counterparts from the Government and the Central Bank are progressing, generally in line with the path envisaged in the half-yearly roadmap. Market interest rates have risen, reflecting the pass-through of restrictive monetary conditions In response to restrictive monetary and liquidity conditions, most market lending rates have adjusted upward.
The Central Bank Monetary Council decided to maintain the Permanent Deposit Facility (SDFR) rate and the Permanent Loan Facility (SLFR) rate of the Central Bank at their current levels of 5% and 6% taking into account macroeconomic conditions and expected developments on the national and global fronts.
Yields on government securities, which rose significantly, stabilized with stronger subscriptions at primary auctions, reflecting improving market sentiment.
At the same time, credit to the private sector, which has grown in part thanks to the easing of monetary conditions, slowed somewhat in September 2021. However, data for the nine months ending in September 2021 indicate that Credit flows, in particular to the industrial and service sectors of the economy, have improved markedly, thus supporting the recovery of the economy.
In the meantime, public sector credit from the banking system, especially net credit to the government, continued to expand. Inflation has accelerated recently, mainly due to supply side disruptions and soaring commodity prices internationally.