Sri Lanka President hopes political hit on economy will end after court case

ECONOMYNEXT – Sri Lanka’s political situation has been wrongly interpreted as a crisis by foreign lenders and conditions will come back to normal in early December, President Sirisena said as bond yields shot up, the rupee fell rapidly, and plans to roll-over debt appear to have been dropped.

Sirisena said there was a political disturbance in Sri Lanka rather than a big crisis.

"As I see it in the current politics of Sri Lanka there is no big conflict," President Sirisena told a Colombo-based foreign correspondents Sunday.

"There is a problem inside parliament. In India we have seen that. In Japan and the US also we see conflicts. Sometimes there is violence."

"In Australia Malcolm Turnbull changed. When I went to Japan, there was a crowd with a board saying we do not want the PM."

Sri Lanka’s bond yields surged after Mahinda Rajapaksa was suddenly appointed Prime Minister by President Sirisena on October 26.

After spiking in 2015, amid a questionable budget and retrospective taxes, yields of Sri Lanka bonds started to fall in 2017 and 2018 after a balance of payments crisis was ended by higher interest rates.

The yield on a bond issued in 2014 for 6.0 percent was trading around 4.2 percent in September shortly before the Rajapaksa was appointed.

The yield suddenly shot up to 9 percent according to Bloomberg data.

The first credit downgrade came from Moody’s.





Sri Lanka has since abandoned plans to go to markets to roll-over the bond and is looking for other means to repay debt, Presidential Advisor Lalith Samarakoon told reporters.

Meanwhile President Sirisena said Theresa May in the UK and Angela Merkel in Germany was also taking forward an administration with difficultly which was normal in democratic countries.

"So fisticuffs inside parliament, conflicts, disturbances and changing Prime Minsiters are normal happenings in the world. We also saw in Russia," President Sirisena said.

"But this problem has been wrongly shown to be bigger than the actual situation. It is in that situation that the various challenges that you mention has emerged to the economy.

"But I think that by the 7th of next month the case (on dissolution) will be heard and finished in the Supreme Court. Then on or around 7th, the order will come. Then all these problems will end."

Past experience has shown that once downgraded, rating agencies do not reverse their views easily.

Sri Lanka also has a soft-pegged exchange rate, where the central bank intervenes in forex markets and then prints money, unlike a floating exchange rate, in a contradictory policy framework, which has got countries in Latin America and elsewhere into serious trouble even if fiscal policy is improving.

There have been calls to scrap the central bank and dollarize or set up a currency board so that Sri Lanka can progress like an East Asian financial centre. (Colombo/Nov26/2018)

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