Brexit fallout on Sri Lanka not “major”; can make bonds pricey: CB Governor

ECONOMYNEXT – The fallout of ‘Brexit’ from the trade and tourism channels may not be "major", but Sri Lanka could end up paying higher rates for foreign borrowings, Central Bank Governor Indrajit Coomaraswamy said.

"The one line answer is that I don’t think it will be very significant," Governor Coomaraswamy told reporters.

About 10 percent of Sri Lanka’s total exports went to the UK and Sri Lanka could lose some of it.

"Tourism there may be a negative hit. But none of these are major," he said.

Sri Lanka did not import much from the UK, Coomaraswamy said, and a weaker pound will benefit Sri Lanka he said.

However the UK is a key education destination and a weaker pound could help parents who send their kids for further studies, analysts say.

Though the pound is down about 10 percent, and a 31 year low against the US dollar, Sri Lanka’s rupee collapsed from 131 from 147 over the past year as the central bank failed to raise rates and printed tens of billions of rupees to inject excess demand to the economy.

"Where it could have an impact – not only for Sri Lanka but any country that wants to go to the market – then the terms are likely to be higher than it would have been if Brexit wasn’t there."

Paradoxically however US long bond yields – on which Sri Lanka’s sovereign bonds are priced – have also started to fall with Euro denominated bonds finding less favour among investors with EU’s future being in doubt.

How long the Sterling will be weak is also uncertain, though Bank of England has signalled it may loosen policy.

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The strength of an exchange rate is not decided by real economy developments but by the monetary policy regime and stance of the central bank (or not) by the domestic credit system. (Colombo/July06/2016)
 

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