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Urgent need to raise foreign currency funding

It was reported that the trade deficit, to end August 2020, was US $ 3.8 billion, compared with US$ 4.8 billion to end August 2019. There is no doubt that the current reforms will provide solutions to some of the structural issues in the economy; yet there is a need to address the country’s emerging macroeconomic vulnerabilities.

While improving trade balance with increased focus on exports, import substitution and restricting non-essential imports will help to resolve the debt service issue in the medium term, a failure to raise foreign currency funding, in the near future, may retard economic growth prospects. Even the Government’s medium-term development programme could get destabilized. The country would then be compelled to ask lending institutions to restructure its debt portfolio in order to avoid Sovereign default.

The recent Sovereign rating downgrade is one example of how perceived and potential macroeconomic vulnerabilities could provide opportunities for malicious forces to destabilize the country’s ongoing progress. Manufacturing and service sectors are badly affected and the agriculture sub-sector could only contribute 10% to the GDP, although such revenues are getting tricked-down to most vulnerable social groups in the bottom of the pyramid.

It is essential that all efforts are taken to ensure that ground level improvements are reflected in GDP estimates, on which other key ratios of the economy depend. GDP estimates of Sri Lanka have been constantly subject to criticism as being unable to capture new economic activities, such as the digital economy, home gardening and Port City related developments, etc.

Several indicators, such as the budget deficit and debt levels, are monitored by rating agencies and foreign investors as a ratio of GDP. While rectifying anomalies in GDP compilation is critical, there is an increasing need to address these factors with a medium-term fiscal consolidation programme, as envisaged in ‘Vistas of Prosperity’.

Economic indicators to enhance investor climate

The Department of Census and Statistics, which calculates the GDP numbers, would have to make an attempt to capture all value-added services during the partially closed down months. Nevertheless, it is expected that the 2nd quarter GDP growth rate is in negative and it could be a substantially higher negative growth, say in double digit. A large adverse GDP growth estimate in Q2 could result in a large negative growth during the year. It was reported recently, in the prestigious ‘Economist’ magazine, that except China, all other countries have recorded negative growth during the second quarter ’20. This would mean that all the socio-economic ratios, such as debt to GDP, government budget deficit, current account deficit, per capita income and GDP growth rate itself will record huge adverse variances. The level of gross official foreign reserves, coming down to below US$ 6 billion, by end December 20, will create issues as it could be equivalent to just four months of imports.

The presentation of the National Budget 2020 will provide the Sri Lankan Government the best opportunity to spell out its strategies to address these key macroeconomic vulnerabilities, allay the fears of investors and creditors, and decisively tackle adverse publicity spread.

Until international capital markets commence normal operations, it may not be that easy to raise international sovereign bonds. Therefore, continuous engagement with friendly countries, and multilateral agencies, of which we are members, is essential in order to raise required funding needed for debt servicing and continue development activities. Alternatively, it is important to explore possibilities of raising bi-lateral – government to government – loans. The writer is of the view that along with the fiscal consolidation, there is an urgent need to provide fiscal stimulus packages, which would require funds even to meet the upcoming significant foreign debt service repayments. In the circumstances, it is prudent to take immediate measures to obtain at least US $ 1 billion to enhance foreign currency reserves.

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