We are committed to honour all debt obligations

Q/ What do you have to say about the economic crisis in Sri Lanka?

Currently, the economic activity in the country is severely affected by recent adverse developments in the global front, in terms of disruptions to supply chains and surging commodity prices, as well as in the domestic front, particularly in the form of power interruptions and supply shortages.

The current shortage of essential items such as fuel and LPG is mainly stemming from the lack of liquidity in the domestic foreign exchange market in the absence of significant forex inflows. Considering these developments, the Central Bank has announced a comprehensive policy package to counter the economic headwinds the country is facing at present.

Allowing greater flexibility in the exchange rate is one of those measures. Following this initiative, the conversion of foreign exchange earnings through formal channels has already shown an increase. We expect that these concerted efforts will gradually help alleviate the temporary pressures posed by the present economic challenges.

Despite the adverse speculation of certain parties and sovereign credit rating downgrades, Sri Lanka was able to maintain its unblemished record of debt servicing—including the settlement of $500 million in international sovereign bonds in January 2022. While also providing liquidity support to finance the essential import bills, we have been able to service the foreign debt in a timely manner thus far. The government and the CBSL are committed to honouring all forthcoming debt obligations as well.

Q/ Has India extended any help?

A/ The India-Sri Lanka relationship is rooted in shared cultural ties, economic partnerships and diplomatic cooperation. Hence, India has been a long-standing supporter of Sri Lanka in challenging 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 has provided this swap facility.

In addition, India has agreed to provide a $500 million credit line to finance purchase of petroleum products and a $1 billion credit line to finance essential commodities. These facilities would certainly help enhance the availability of essential supplies and also control supply-driven price pressures while reducing the pressure stemming from import demand for forex.

Q/ Sri Lanka printed currency worth LKR 1.2 trillion in 2021. Has this helped?

A/ In economics terms, there are two key methods through which the CBSL can print new money (and issue to the economy). On the one hand, when the CBSL grants credit either to licensed commercial banks or to the government, it prints new money, which is technically known as the accumulation of domestic assets.

On the other hand, when the CBSL purchases foreign exchange from the domestic foreign exchange market or from the inflows received to the Government, it prints new money, which is technically known as the accumulation of foreign assets. The total value of these two assets is called reserve money. Reserve money would increase if either one or both of such assets increase, and vice versa. Money printing is usually considered as the increase in the stock of reserve money.

The country’s reserve money has increased only by LKR 341.4 billion in 2021. Currency in circulation, which is another alternative definition of money printing and a component of reserve money, increased by around LKR 170.3 billion, in order to fulfil the increasing demand for currency amid the pandemic and to facilitate increasing transactions in the economy.

Increased funding requirements by the government, amidst the pandemic-impacted revenue losses and limited access to international capital markets, compelled the CBSL to provide financial support to the government through the purchase of government securities.

As such, on a net basis, CBSL holdings of government securities increased by LKR 691.6 billion in 2021. However, as and when the CBSL sells foreign exchange to the government to settle a foreign currency loan or the CBSL provides foreign exchange to the banking system to ensure uninterrupted imports of essentials, the impact on the monetary base due to the CBSL purchases of government securities is negated and money available in the economy is reduced by the same amount. Accordingly, during 2021, the net foreign assets of the CBSL declined by LKR 912.9 billion, thereby negating the net increase of the CBSL holdings of government securities during 2021.

Q/ You recently sought help from the IMF.

A/ A potential IMF engagement is expected to support the balance of payments position of the country and policies promoting greater macroeconomic stability. In the current context, there is a need to secure a sizeable amount of foreign financing in the immediate future. This can be facilitated through an IMF engagement while conducting the necessary policy and structural reforms. Working with the IMF would enhance investor confidence and encourage non-debt-creating inflows. It would also help augment international reserves and put growth on a sustainable path. The formal discussions with the IMF are expected to begin soon.

Q/ Did Sri Lanka’s allies, including China and India, delay bilateral credit lines?

A/ No, not at all. On the contrary, the execution of these bilateral credit lines is progressing very well. India and China had always been trusted bilateral partners and we highly appreciate their continued financial assistance to Sri Lanka not only at difficult episodes but also throughout all these years on our way towards achieving sustainable and inclusive economic growth.