Fiscal reforms delay will extend time of pain - CB Chief | Sunday Observer

Fiscal reforms delay will extend time of pain - CB Chief

9 July, 2022
Dr. Nandalal Weerasinghe
Dr. Nandalal Weerasinghe

Monetary and fiscal policy must go hand-in-hand to solve the economic crisis and shorten the turbulent  times the country is going through,  Central Bank Governor Dr. Nandalal Weerasinghe told the media while outlining the monetary policy stance of the bank on Thursday.

He said the Central Bank alone cannot solve the economic crisis. Fiscal policy too must come into the overall picture to achieve economic stability.

The puzzle will be completed only when fiscal reforms are addressed and State Owned Enterprise (SOE) reforms are undertaken, the Governor said, adding that the Government is still running on large fiscal deficits.

He said faster implementation of the expected fiscal reforms aimed at strengthening government revenue mobilisation and expenditure rationalisation is needed to reinforce fiscal consolidation efforts, including the expected improvements in the financial position of state-owned business enterprises. Such adjustment in fiscal sector performance would result in a decline in gross financing needs of the Government in the period ahead, and help scale down monetary financing at a faster pace, the governor said.

Citing examples he said despite the pricing formula, the Ceylon Petroleum  Corporation does not have sufficient rupees to buy US dollars for fuel. It does not get the money from the Ceylon Electricity Board because the CEB too is yet incurring losses.

The delay in implementing fiscal policy reforms and turning loss making SOEs into profitable ventures will extend the time of pain people will have to undergo, the governor said.

He said inflation which is currently around 50 percent might go up to around 70 percent by which the poor and the vulnerable would be the hardest hit segments.

The IMF support program is to support the poor and the vulnerable groups of society.

If inflation reaches 100 percent which is hyper inflation no one would be able  to do business, Dr. Weerasinghe said. The Monetary Board of the Central Bank tightened key policy rates as it deemed necessary to contain any build-up of adverse inflation expectations.

Accordingly the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points to 14.50 per cent and 15.50 per cent.

On the current status with the IMF negotiations and debtors the governor said satisfactory progress has been made with regard to the Extended Fund Facility program and discussions with bilateral and multilateral partners on bridging finance.

However, the regulator notes that domestic economic activity during the second quarter of  this year would be severely affected by the continued supply side disruptions, primarily due to the shortages of power and energy and amid adverse developments on the domestic front, geopolitical tensions in Eastern Europe could pose further risks to domestic economic growth in the near term.

As per the GDP estimates of the Department of Census and Statistics, the economy contracted by  1.6 percent, year-on-year, in the first quarter this year.

The trade deficit narrowing in May  over the corresponding period of last year, largely supported by the policy measures that were aimed at discouraging non urgent imports, alongside the constrained foreign exchange liquidity in the domestic foreign exchange market was the silver lining amid all the gloom and doom.

Foreign exchange inflows in the form of workers’ remittances and tourism earnings remain lower than expected, impacted by unfavourable conditions domestically and globally. The exchange rate, which underwent a severe bout of depreciation in March 2022, remains broadly stable with the introduction of market guidance from mid-May 2022. Gross official reserves, as at end June 2022, are estimated at US dollars 1.9 billion, including the swap facility from the People’s Bank of China equivalent to around US dollars 1.5 billion, which is subject to conditionalities on usability.