ECONOMYNEXT – Sri Lanka hopes to boost foreign inflows in the near future through investments, remittances, and tourist arrivals, Cabinet Co-spokesman Minister Ramesh Pathirana said as imports hit a 17-month high in July, as money printing boosted credit and created forex shortages.
Sri Lanka is facing a severe external crisis as well as a domestic crisis with revenues falling and expenses continuing to go up, amid a Coronavirus crisis, Finance Minister Basil Rajapaksa told the parliament last week as money printing triggered forex shortages and made it difficult to repay foreign debt
Central Bank credit to government or printed money grew 157 percent to 1.4 trillion rupees inserting new rupee reserves into to the banking system to drive unsustainable loans and imports, pushing outflows above inflows of dollars and putting pressure on the rupee.
Private credit grew 14.9 percent to 6.6 trillion rupees in the year to July 2021, and government borrowings from the banking system outside of central bank soared 26.7 percent to 4.0 trillion rupees.
Despite import controls, credit drove imports to a 17-month high of 1.7 billion US dollars.
Net foreign reserves of the central bank were down to 10.3 billion rupees by July (about 51 million US dollars) and were on track to be negative.
President Gotabaya Rajapaksa appointed his younger brother Basil as Finance Minister to handle steadily worsening twin deficits in external and domestic sectors.
“There is no significant change in the policy,” Minister Pathirana told a weekly cabinet press briefing when asked if the government is contemplating any economic policy changes after the finance minister has identified the key weaknesses of the economy.
“Hopefully, we keep our fingers crossed and we are looking forward to receiving some investments also and foreign remittance also would be increasing in time to come.”
Foreign remittance also fell, driven away after parallel exchange rates developed amid money printing. The official exchange rate is 203 rupees to the US dollar and the kerb market and traditional cross-border payment systems (Undiyal) are around 230-240 to the US dollar.
“The world as a general phenomenon coming out of this pandemic scenario, hopefully we will get tourists to this country by November-December and we will generate much needed dollars in the local economy.
“That is the way forward. And also specific plans would be detailed in the 2022 budget.”
Government revenues were below target and state spending had increased, Finance Minister Rajapaksa said.
In the six months to June, revenues rose to 714 billion rupees from 663 billion last year, but were 20 percent below 2019, before tax cuts were made for stimulus. In the first six months only 35 percent of the projected 2,019 billion rupees of revenues was collected.
The government was rationalizing spending, by a hiring freeze and cost management, Minister Rajapaksa said told parliament.
In August foreign reserves recovered to 3.5 billion rupees US dollars from 2.8 billion helped by a 150 million US dollar swap from Bangladesh and around 800 million US dollar special drawing rights allocation from the IMF. However, on a net basis, the country has almost zero reserves.
Forex shortages came despite record exports.
“Fortunately, our exports have gone up a little in all sectors including apparel, plantation and also other sectors,” Pathirana said.
President Gotabaya Rajapaksa has appointed former state minister Ajith Nivard Cabraal to run the central bank with effect from Wednesday (15) in a bid to fix the economic problem.
“I will concentrate on stability first and growth,” Cabraal told EconomyNext.
The central bank has already restricted many items which it defined as nonessentials to the public as money printing pushed up credit and imports.
There is no interbank spot market for foreign exchange, and forward cover has been banned.
Sri Lanka has rejected an International Monetary Fund bailout.
Parliament also passed a law last week to facilitate Sri Lankans to bring their stashed cash from foreign countries with just a 1 percent tax and invest in the country while ensuring the anonymity of such people. (Colombo/Sept.14/2021)