Central Bank Governor Dr. Indrajit Coomaraswamy debunked as a total myth media reports which stated that depreciation of the rupee aggravates the country’s debt liability
“To state that the debt liability will aggravate when the rupee depreciates is utter nonsense.
we borrow in dollars we have to pay back in dollars. Repayment cannot be done in local currency. Of course for accounting purposes it is recorded in rupees,” the Governor said while addressing the media at the launch of the 2017 Annual Report of the Central Bank last week.
The Governor said it is silly to state that the loss incurred by the devaluation of the currency could have been used for constructing ports and airports for the country. Does it mean that we could gain if the currency is appreciated. When the currency depreciates the borrower gains.
“It is important to understand the concept. The exchange rate is a topic misunderstood in Sri Lanka. Many think that the country incurs a loss when it has to repay loans with a devalued currency. Its not the case as repayment of loans has to be done in dollars and not in local currency,” the Governor said.
The rupee depreciated by 0.8 percent last week and 1.3 percent so far this month. The rupee weakened 2.5 percent so far this year while dropping 2.0 percent last year and 3.9 percent in the previous year.
Sri Lanka’s debt dynamics is such that debt servicing of domestic loans is set to peak this year and thereafter bunching up from next year up to three years.
Sri Lanka’s foreign debt stood at around US$ 8.6 billion at end 2016. Data also shows that sovereign bond maturities up to around US$ 5 billion is due from next year to 2022.
However, the Central Bank is pleased with the official gross reserves in the country currently at US$ 10 billion.
“Foreign Direct Investments has been good this year and last year was a record year,” the Governor said.
Deputy Governor Dr. Nandalal Weerasinghe said that what is important is to focus on an inflation targeting regime which will set off much of the problems of the exchange rate.
“Central Banks in the world have been successful in anchoring inflationary expectations and thereby stabilizing the inflation rate,” he said. However, the Governor looked disappointed once again with the economic growth rate recorded last year which was much below the potential rate.
The economy recorded 3.1 percent growth last year below the potential rate of 5.5 percent with a big output gap,” the Governor said.
The forecast for this year seems much better as the Central Bank expects economic growth to be around 5 percent.
“ Economic growth this year be about five percent or may be a shade under but four percent is too low because we have the GSP Plus benefit, FDIs and exports to pick up,” Dr. Coomaraswamy said.
The Central Bank attributed adverse weather and its spill over effects for the poor economic performance last year.
Services and industry related activities which together account for 92.4 percent of gross value added recorded a growth rate below 4 percent. Agricultural activities recorded a negative growth rate for the second consecutive year despite a recovery in the sector during the fourth quarter.
However, the bank stated that in spite of low real GDP growth last year the economy created sufficient employment opportunities that included a further reduction in unemployment to 4.2 percent in 2017.
According to the Central Bank Sri Lanka’s per capita GDP in 2017 reached US$ 4,065. However, the Governor noted that the country could progress further only if policy making remains rational with a long term focus on greater public good and minimizing policy swings motivated by short term political gains. “Reforms in trade facilitation, investments and exports are paramount,” the Governor said.