Sri Lanka’s central bank urges fast tracking trade reforms

ECONOMYNEXT – Sri Lanka’s central bank says international capital market sentiments on the island’s economic performance are seen improving, but stable policy, a flexible exchange rate, improving trade facilitation and completing trade negotiations were critical to building confidence of hard-nosed investors.  

The central bank in a statement Wednesday said recent foreign inflows to government bonds and stocks, record FDI and sovereign bond issue, and improved credit ratings outlooks were an independent barometer of improving sentiments of international capital markets who "are hard-nosed in their assessments".

"It’s imperative to build on the positive external sentiments by persisting with sound macroeconomic policies:  fiscal consolidation, prudent monetary policies and a flexible exchange rate which supports the competitiveness of the economy," the central bank said.

"This should be supported by the acceleration of structural reforms to strengthen factor markets; improve the investment climate; boost investment promotion, introduce trade facilitation measures; and complete trade negotiations. Political stability is essential for sustained growth and development," it said.

Sri Lanka is currently negotiating a free trade deal with China and recently concluded one with Singapore. It’s also in talks to deepen an existing free trade deal with India to include investments and movement of people.

Customs reforms have stalled, but are still on. The government is also considering formulating a strategy for seamless cross-border trade with the help of the Global Alliance for Trade Facilitation (GATF), a multilateral organisation specializing in trade reforms.

Sri Lanka passed new import laws which set clear rules of how domestic industry will be protected which could potentially curb arbitrary protectionist lobbying and policymaking. The rules also protect consumer rights to access cheap imports.

The central bank also came good its commitment to a flexible exchange rate, after the rupee tumbled in recent weeks due to a run on US dollars after the central bank printed money over and above seasonal demand to keep a check on policy rates.

It allowed the market to determine the exchange rate and didn’t sell down reserves to defend the rupee. The rupee fell to a record low of 157.80/90 on Friday, 27 April after trading at 155.35/40 a little more than a week earlier.

The central bank said several factors pointed to improving foreign investor sentiments.





In April 2018, Sri Lanka’s largest ever sovereign bond issue for 2.5 billion US dollars was oversubscribed 2.6 times, resulting in gross official reserves reaching a record 9.9 billion US dollars.

"Despite outflows from emerging markets in the wake of normalization of US interest rates as well as synchronized growth in US, Europe and Japan for the first time since the Global Financial Crisis, there have been net cumulative inflows both to the stock market as well as the rupee denominated Government Securities market," the central bank said.

Sri Lanka stocks have seen a net inflow of 9.6 million US dollars in 2018. Net foreign inflows in 2017 amounted to 278.5 million rupees. Inflows into government securities amounted to 6 million US dollars in 2018 and 441 million US dollars the previous year.

FDI flows totalled 1.9 billion US dollars in 2017, the central bank said.

The government is planning to raise 1 billion US dollars via syndicated term loan. Due to a favourable response the government is considering up scaling the loan and repay more expensive debt.

In 2017, ratings agencies Standard and Poor’s and Fitch changed the outlook on Sri Lanka to stable from negative. 

"A staff-level agreement has been reached on the 4th Review of the IMF Extended Fund Facility, subject to Cabinet approval of the automatic fuel pricing formula. The 5th tranche of the IMF facility is expected in June 2018," the central bank said.  

"Since June 2017, the IMF has issued several positive statements regarding improving macroeconomic stability and outlook," the central bank said. (COLOMBO, 02 May, 2018)

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