The country’s gross official reserves are expected to record around USD 7.4 billion towards the end of this year with the sale of non-strategic State assets and the raising of a sovereign bond by the government, according to the Central Bank.
Foreign reserves, which was in a perilous state early last year, received a boost with the Extended Fund Facility by the International Monetary Fund (IMF) mid last year bringing the reserve base to around USD 6 billion by the end of last year. The Gross official reserves were estimated around USD 5.5 billion by the end of January this year.
“We are confident that the official reserve base will surpass USD 7 billion by the end of this year with a syndicated loan of around USD 1 billion and a sovereign bond of USD 1.5 billion to be raised by the government this year,” Central Bank Governor Dr. Indrajit Coomaraswamy said.
Speaking at a Monetary Policy Review meeting at the Central Bank recently, the governor was upbeat that the reserve base will grow to a fairly solid base if the agreement with China Merchant Port Holdings Company is reached which will bring around USD I billion to the country.
“Foreign Direct Investments (FDIs) with no outflows are extremely vital for the country to boost its reserves,” the Governor said.
However, the sale of State assets by the government has come under sever criticism by the Joint Opposition which claims that such a move will not benefit the country. Citing an example to counter the argument the governor said if a household is indebted what should be the best option. Is it to sell the three wheeler or reduce expenditure on education? If something is no longer beneficial divesting it is the best thing to do. The sale of non strategic assets will help reduce the debt burden of the country.
“The country has potential to record a growth rate of around six percent. We see the economy is gradually responding to stabilization measures adopted by the Central Bank and the government since 2015. That is why we have decided to keep the key policy rates unchanged,” the Governor said.
However, the Central Bank sees the need to closely monitor the macroeconomic development in the period ahead with a view to adopt corrective measures if needed.
The growth of credit to the private sector amidst high interest rates to remain around 21.9 percent in 2016 is a concern for the regulator which sees the expansion as a possibility of overheating the economy.
“Private sector credit expansion has been greater than what we expected. There is some space for credit growth without allowing it to overheat the economy,” the governor said.
“However we will monitor the situation closely since the increasing trend in credit growth is a worrying us. Lending by the two State banks , the Bank of Ceylon and People’s Bank has been high. We will speak to the two State banks about this,” Dr. Coomaraswamy said.
Despite the increasing trend in core inflation headline inflation remained at mid single digit level. Inflation is projected to remain in the mid single digit level this year.
The widening trade deficit too has been a worrying factor to the regulator which hopes to take measures to address it. The regulator hopes to maintain a flexible exchange rate policy while not allowing wide fluctuations.
However, the governor said it is not a sine qua non for the problems. “On top of that we need a to see the foreign investment climate improving.”
“Trade facilitation with the main clearing house to be a one stop shop, trade agreements with India, China, Singapore and the GSP plus concessions expected around April or May with a preferential access to a market of around three billion people will boost export revenue,” the governor said. Export earnings declined 2.7 percent (y-o-y) to USD 9.4 billion during the first eleven months of 2016 while expenditure on imports rose 1.7 percent (y-o-y) to USD 17.6 billion during the first eleven months of 2016. The trade deficit during Jan-Nov 2016 increased to USD 8.2 billion from USD 7.6 billion recorded during the same period of 2015.
A Framework Agreement was signed with China Merchants Port Holdings Company Limited for what the government called ‘revitalization’ of the Hambantota Port on a Private–Public Partnership (PPP) model.