Sri Lanka to maintain stable rupee, draw foreign investors: Minister Cabraal
ECONOMYNEXT – Sri Lanka will maintain a stable rupee and competitive interest rates and create conditions to bring back foreign investors to capital markets, State Minister for Finance Nivard Cabraal said.
“We will keep a stable rupee, and competitive interest rates for all to do business,” Cabraal said soon after assuming office at the Finance Ministry in Colombo.
Sri Lanka’s rupee fell from 131 to the US dollar at the end of 2014 to 182 to the US dollar by the end of 2019 amid ‘flexible exchange rate’ (a discretionary external anchor) and ‘flexible inflation targeting (a discretionary domestic anchor) while growth plunged.
Most foreign investors in rupee bonds left as the credibility of the peg weakened steadily. Foreign investors in stocks, some whom have been in the country for decades are also leaving.
Meanwhile Cabraal, a former central bank governor until the end of 2015, said there were 3.4 billion US dollars of foreign investments rupee Treasuries five years ago, which had fallen to below 200 million US dollars.
“We have to raise this,” he said. “We have to follow policies that help capital to flow in to debt and equities markets.”
The administration will support domestic businesses to be strong but also create conditions to draw foreign investors, he said.
“We will protect and support domestic businesses to become strong,” he said. “We are open to the world. We are asking the world to come and do business with Sri Lanka.”
“Some of these policies may sound contradictory, but that is where we must maintain a balance.”
He said Sri Lanka has never defaulted on foreign debt and will maintain the record.
“We now have political stability and a strong mandate to make economic decisions,” he said.
State enterprises will be strengthened, not sold he said.
He said the control of Covid had laid a strong foundation, though there were many challenges ahead.
Sri Lanka had already used some tools to stimulate the economy.
“We will use the all tools available to stimulate the economy,” he said.
However countries with pegged exchange rates that engage in stimulus may have unfortunate consequences, analysts say.
Sri Lanka earned a downgrade after an estimated loss of about 500 billion rupees in taxes in a ‘fiscal stimulus’ of about 3.8 percent of gross domestic product.
After the crisis Sri Lanka injected liquidity of over 420 billion rupees which is a monetary stimulus of about 2.7 percent of estimated GDP, which sent the rupee reeling to 200 to the US dollar until private credit turned negative.
Import controls, not seen since the collapse of the Bretton Woods system of soft-pegs in 1971, have also been brought in.
The rupee has since been allowed to return to around 184 to the US dollar. (Colombo/Aug14/2020)