Central Bank asks to bank on foreign sentiments to gauge local economy

„In response to recent criticism, highlights favourable response to sovereign bond, termloan and higher FDIS and reserves „Fifth tranche of IMF facility expected in June

The Central Bank said that one should look outward to gauge the health of the local economy, which has been making progress in the eyes of the foreign investors as they provide an independent barometer of the Lankan economy and international capital markets are hardnosed in their assessments.

In a statement issued in response to the recent criticism on Sri Lanka’s economic performance, the Central Bank yesterday said the recent successful sovereign bond, very favourable response to the recent US $ 1 billion term-loan, portfolio inflows to the stock market and the net inflows to the government securities were testaments to the progress in the country’s economy.

However, how far the benefits of such economic advancements have reached the masses remains to be seen.

Sri Lanka’s economy slowed to 3.1 percent in 2017 - lowest in 16 years and the consumption and investments decelerated in response to higher interest rates, taxes and adverse weather conditions.

Mostly Sri Lanka’s economy is in a stalemate over the lack of political stability due to infighting between the ruling coalition partners.

While the macroeconomic fundamentals have been made stronger with better fiscal performance, flexible exchange rate policy, highest gross official reserves in Sri Lanka’s history and the prudent monetary policy, the economy is suffering from a long impasse, which has paralysed many sectors.

The Central Bank said the economic achievements so far 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,” the statement from the Central Bank stressed.

Sri Lanka in April raised US $ 2.5 billion via an international sovereign bond issue - the country’s largest ever - at relatively favourable yields, which saw oversubscribing by 2.6 times.

With the receipts of the bond proceeds, gross official reserves have increased to US $ 9.9 billion, which is historically the highest level, the Central Bank said.

The Central Bank is building buffers to stay ready to retire the massive foreign debt repayments bunching up from 2019 onwards.

The government has also called for RFPS for a term loan of US $ 1 billion and given the favourable response, the government is considering upscaling this loan and to utilise the incremental proceeds to repay more expensive existing debt. According to the Central Bank data, there have been foreign portfolio investments in equity, through primary and secondary market investment in the Colombo Stock Exchange to the tune of US $ 9.6 million to date in 2018. In 2017, inflows amounted to US $ 278.5 million. The net inflows into the government securities market amounted to US $ 6.05 million so far this year. In 2017, the net inflows amounted to US $ 441 million.

The FDI flows of US $ 1.9 billion in 2017 were an all-time record, albeit from a low base.

“In addition, staff-level agreement has been reached on the fourth Review of the IMF EFF, subject to Cabinet approval of the automatic fuel pricing formula. The fifth tranche of the IMF facility is expected in June 2018,” the Central Bank said. President intervenes...

The gem exporters also charged that the top officials of the NGJA were not catering to industry needs while exhausting the exporters’ funds on various foreign tours instead of export promotion activities.

The SLGJA officials said that they would discuss the export tightening measures with the new NGJA chairman, who is yet to be appointed.

In addition, the SLGJA has also explained to the President about the negative implication of the recent 15 percent import duty imposed on gold imports, particularly its adverse impact on foreign exchange earnings from gold jewellery exports and jewellery sales to tourists.

The SLGJA officials point out that the removal of the income tax exemption through the new Inland Revenue Act (IRA) has also made Sri Lankan gem and jewellery exports less competitive in the international markets where the competition is extremely high with leading market players such as Hong Kong and Thailand, which have very liberalised policies encouraging exports of value-added gems and jewellery.

The SLGJA said such industry issues would be discussed with the relevant authorities in the upcoming weeks.

According to the SLGJA, the exports of gem and jewellery from Hong Kong have reached US$27 billion per annum and Thailand’s gem and jewellery exports amounts to US$13 billion per annum while the Sri Lankan export earnings lag well below US$300 million due to various policy issues.