Economy has somewhat stabilised - CB Governor | Sunday Observer

Economy has somewhat stabilised - CB Governor

9 October, 2022

In an interview with the Sunday Observer Central Bank Governor Nadalal Weerasinghe talks of his plans to improve the country’s economy that has taken a free fall.

Excerpts of the interview:

Q: You took the steering wheel of a vehicle without brakes. Were you able to stop the vehicle or is it still moving towards a precipice?

A: We have been able to stop the vehicle and bring it under our control. Likewise, I can say the economy has somewhat stabilised.

Q: Have we stopped repaying debts owed to foreign countries and banks? What are the next steps in debt settlement?

A: Loans taken from the World Bank and international financial institutions continue to be repaid. Bilateral debt payments have been stopped and restructuring is underway.

Q: The Government has hired international financial and legal advisors Lazard and Clifford Chance. Why is the Government hiring them for a large sum of money when the CBSL already has experts in the field?

A: Debt restructuring is new to us. This is not something we have done previously. Therefore, because we lack the experience, foreign companies with expertise have been contacted for the purpose while lenders also expect us to obtain advice from experts in the field.

Q: How many loans has Sri Lanka paid off since you began your tenure as the Central Bank Governor?

A: The fact that I am the head of the Central Bank is not a significant factor in paying the debt. The amount of debt paid does not increase or decrease. It is the policy that matters. This process has to be continued no matter who is in charge.

Q: Currently, oil and gas queues are gone, prices have reduced to some extent and we are experiencing a positive change. Did Sri Lanka receive the dollars required to bring this about?

A: Today the power cuts have reduced and fuel is being supplied as needed. There are no queues for gas and fuel. The country has somewhat returned to normalcy. This is due to the policy decisions taken by the Government and the Central Bank.

We are now managing our finances and utilising funds for essential necessities. We suspended the payment of foreign debt and directed that money for essential services. We also reduced demand and consumption by tightening the monetary policy. Due to this, it was possible to properly manage foreign exchange received. If that had not happened, there would have been a serious upheaval in the country.

Q: Today people are managing with what they recieve. For example, they are using fuel according to the QR code. Imports have reduced. Doesn’t this display that the situation could have been managed by our country alone?

A: It would have been possible temporarily. But if we want to move forward from this situation, we need to increase our foreign exchange income. Debts to be paid should be reduced and stabilised. If this is done, the country can be in a better position next year. Our hope is to put the country in a better position next year by continuing this program such as getting the support of the International Monetary Fund and extending the grace period for the debts to be paid.

Q: Your move to exert monetary controls by increasing interest rates is commendable. But the people cannot afford the high loan interest rates. Your comments?

A: Interest rates rise relative to inflation. These loans are given with the money of the depositors. Depositors get an interest rate of around 22 percent. If inflation is 60 percent, the value of the money saved will decrease if the interest rate is 22 percent.

Because of this, the saver still does not get an interest that matches the inflation. The borrower has less interest to pay compared to the depositor. Inflation can be brought down only by increasing interest rates. If interest rates are low and inflation is high, there is no point in doing business. Inflation increases the cost of production.

So the first thing that has to be done is to raise interest rates to reduce inflation. Even businesses are collapsing due to rising inflation. If all the businesses collapse and hyperinflation occur the country cannot be rebuilt easily.

Q: But what is important to the people is how long will these interest rates last. How long will the 20 percent bank interest rate being given on fixed deposits last? Your comments?

A: Only if inflation decreases in the future, loan interest rates can be reduced. This month has the highest inflation. According to the Colombo consumer price index, inflation this month is 69.8 percent. As per our forecast, we expect inflation to decrease gradually from next month. If it decreases, the interest rate will decrease. Otherwise, if inflation increases, interest rates will have to be increased. So the important thing is to control inflation.

Q: The prices of goods have increased and people are under a lot of pressure. When will the people get relief?

A: Inflation is an increase in the price of goods. We want to reduce the rate of increase in commodity prices. If the supply of some goods increases, their prices may decrease. Without that, the price of goods will not decrease. Our aim is to control the increase in commodity prices at a low level. Therefore, do not expect that the price of goods will decrease next year. In general, goods that have increased in price have less tendency to decrease in price. In order to reduce the price of goods, inflation must be negative and deflation must occur. But this is unlikely. If a country has deflation for a long time, that economy cannot survive. The industries and production of that country will collapse. In the long run, the decrease in the price of the country’s goods harms the economic stability of that country.

Q: Is Sri Lanka still printing money to generate Government revenue? If so, for what purpose?

A: Taxes are imposed to increase Government revenue. If Government revenue increases, the need to print money can be reduced. Inflation cannot be reduced if money is printed in an unnecessary manner. At the Central Bank, we have to print some amount of money to ensure the continuity of economic activities.

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Even if the Government does not receive any income in that month, it cannot go without paying the salaries of Government employees. Then the Government has to take money from the Treasury or the Central Bank.

In 2020-2021, the expenditure increased three times more than the income of the Government. Therefore, because the income was not sufficient, they continued to take loans from the Central Bank resulting in inflation.

Q: Is the dollar currently on a fixed rate and do we have enough dollars for our urgent needs?

A: A No, the dollar is not currently at a fixed rate. It has been allowed to increase or decrease within a certain range in the market.

Q: What is the total amount of foreign reserves at present?

A: As of September, the country’s gross official reserves are $1.8 billion. This includes a US$1.4 billion equivalent foreign exchange facility from the People’s Bank of China. Export earnings rose to US$1,224 million in August as against US$1,164 million in July. Also, import expenditure rose to US$1,486 million in August compared to US$1,287 million recorded in the previous month.

Q: What is the Government’s plan to boost the economy?

A: The Government’s agenda was presented in the President’s throne speech and in the interim budget. Our intervention is given in the matters of controlling the country’s inflation, the country’s financial policy and foreign reserves.

Q: How long will the country have to wait for inflation to return to its former state?

A: It is not something that can be done in one day. At the moment we are systematically stabilising. After obtaining loans from the World Bank and the International Monetary Fund, the goods should be made available by next year. The country can return to its usual state when the industrial businesses gradually return to their previous state.

Economic growth this year decreased by 8 percent. Because of this, the economic growth rate should increase by 8 percent to return to last year’s level. It will take two or three years. If we continue with this stable economic program, there will be no further collapse. There are difficulties. We have to get through th‍is.

Q: Are some businessmen increasing the price of goods by oppressing the people for the purpose of making a profit? If not, to cover the losses?

A: Why did the price of flour increase? The main reason was the increase in the price of flour in the international market. Also, there is a shortage of flour. Then the cost of production increases. After the price increases, it becomes unaffordable. Then sales decrease. In a country where there are competitive businesses, if the prices of various products are raised unfairly, those products cannot be sold.

Q: What is the status of borrowing from the International Monetary Fund at this time?

A: So far we have reached an agreement with them. They have accepted the program carried out by the Government and the Central Bank. It is during the implementation of this program that the IMF starts providing financial support. It is expected around December. To get the IMF loan we need to restructure our debt and bring it to a sustainable level first. It should be discussed with the creditors. Lending begins with that trust. We hope to receive the loan by December this year or January next year.

Q: If the 3 billion US dollars intended to be provided by the International Monetary Fund are lost, are you ready for a second step?

A: If the loan is delayed, the status quo will continue. But if more money is received, the country can be restored to normal status.

Q: A budget is coming soon. The affected people are expecting relief. Will the Government really be able to provide relief in the upcoming budget?

A: A budget is a policy statement. The program on how to bring about economic stability in the coming year should be presented through it. There may or may not be a relief.

Reducing the price of goods using subsidies will not help the economy. The country may fall into more trouble. In the long run, relief can be given to the people only if the economy is stabilised. It is hoped that a program for that will be presented in the upcoming budget.

Q: Attention has also been paid to holding an election. Is an election necessary for the country at this time? Do you believe that the country can be saved by holding an election?

A: It is part of the political process. As Governor of the Central Bank, I should not comment on such things. No matter who is the President or Prime Minister, no matter which Government comes, it is necessary to implement the program of building the country. Whoever comes to power should have the ability to make politically unpopular decisions.