Urgent need to raise foreign currency...

It was reported that the trade deficit to end-august 2020 was US $ 3.8 billion, compared with US $ 4.8 billion to endAugust 2019. There is no doubt that the current reforms will provide solutions to some of the structural issues in the economy. Yet, there is a need to address the country’s emerging macroeconomic vulnerabilities.

While i mproving trade balance with increased focus on exports, i mport substitution and restricting non-essential imports, will help to resolve the debt service issue in the medium term, a failure to raise foreign currency funding in the near future may retard economic growth prospects. Even the government’s medium-term development programme could get destabilised. The country would then be compelled to ask lending institutions to restructure its debt portfolio, in order to avoid sovereign default.

Macroeconomic vulnerabilities

The recent sovereign rating downgrade is one example of how perceived and potential macroeconomic vulnerabilities could provide opportunities for malicious forces to destabilise the country’s ongoing progress.

Manufacturing and service sectors are badly affected and agriculture sub-sector could only contribute 10 percent to GDP, although such revenues are getting tricked down to most vulnerable social groups in the bottom of the pyramid.

It is essential that all efforts are taken to ensure that ground-level improvements are reflected in GDP estimates, on which other key ratios of the economy depend. GDP estimates of Sri Lanka have been constantly subject to criticism as being unable to capture new economic activities, such as the digital economy, home gardening and Port Cityrelated developments, etc.

Several indicators, such as the budget deficit and debt levels are monitored by rating agencies and foreign investors as a ratio of GDP. While rectifying anomalies in GDP compilation is critical, there is an increasing need to address these factors with a mediumterm fiscal consolidation programme as envisaged in ‘Vistas of Prosperity’.

Importance of economic indicators to enhance investor climate

The Census and Statistics Department, which calculates the GDP numbers, would have to make an attempt to capture all valueadded services during the partially closed down months. Nevertheless, it is expected that the second quarter GDP growth rate is in negative and it could be substantially higher negative growth, say in double digit.

A large adverse GDP growth estimate in 2Q could result in a large negative growth during the year. It was reported recently in the prestigious ‘Economist’ magazine that except China, all other countries have recorded negative growth during the second quarter 2020. This would mean that all the socio-economic ratios such as debt-to-gdp, government budget deficit, current account deficit, per capita income and GDP growth rate itself, will record huge adverse variances.

The level of gross official foreign reserves coming down to below US $ 6 billion by endDecember 20 will create issues, as it could be equivalent to just four months of imports.

The presentation of the National Budget 2020 will provide the Sri Lankan government the best opportunity to spell out its strategies to address these key macroeconomic vulnerabilities, allay the fears of investors and creditors and decisively tackle adverse publicity spread.

Need to raise foreign currency funding

Until international capital markets commence normal operations, it may not be that easy to raise international sovereign bonds. Therefore, continuous engagement with friendly countries and multilateral agencies, of which we are members, is essential in order to raise required funding needed for debt servicing and continue development activities.

Alternatively, it is i mportant to explore possibilities of raising bilateral – government-to-government loans. The writer is of the view that along with the fiscal consolidation, there is an urgent need to provide fiscal stimulus packages, which would require funds even to meet the upcoming significant foreign debt service repayments.

In the circumstances, it is prudent to take immediate measures to obtain at least US $ 1 billion, to enhance foreign currency reserves.