Central Bank says multiple signals by international capital markets, rating agencies and IMF show SL reaping benefits of strengthening macroeconomy, fiscal consolidation
Level of external support of economy positive
Evidence seen in IMF staff level agreement, rating changes, oversubscribed bonds, high FDI
Reserves at historic high of $ 9.9 billion, inflows to stock market and Govt. securities positive
Structural reforms, particularly on trade facilitation and investment crucial to realise economic potential Highlights need for political stability
Multiple signals of recent foreign confidence in Sri Lanka’s economy have provided an opportunity for the country to tap into its economic performance and potential, the Central Bank said yesterday, calling for fast-tracked trade reforms and stronger political stability to attract investment.
The Central Bank said in recent days, serious concerns have been expressed regarding the performance of the Sri Lankan economy. In this context, the Central Bank noted it would be instructive to gauge the level of external support for the Sri Lankan economy from international capital markets. This would be an independent barometer of the health of the Sri Lankan economy as international capital markets are hard-nosed in their assessments, it asserted.
The Central Bank in a statement released a list of developments, which it insisted was evidence of improving global confidence in the Sri Lankan economy and its prospects. It highlighted a staff-level agreement reached on the 4th Review of the $ 1.5 billion Extended Fund Facility (EFF) Sri Lanka has with the International Monetary Fund (IMF), subject to Cabinet approval of the automatic fuel pricing formula. The 5th tranche of the IMF facility is expected in June 2018. After June 2017 the IMF had issued several positive statements regarding improving macroeconomic stability and outlook.
Last year two ratings agencies, namely S&P and Fitch, changed the outlook to stable from negative, the Central Bank observed.
It listed the largest ever International Sovereign Bond (ISB) amounting to $ 2.5 billion which was successfully issued as one such example. It was 2.6 times oversubscribed. Large orders were placed by some of the world’s largest and most reputed investment funds, the Central Bank added.
“With the receipt of ISB proceeds, gross official reserves have increased to $ 9.9 billion which is historically the highest level. There has been a very favourable response to the RFP for a term loan of $ 1 billion. The Government is considering up-scaling this loan and to utilise the incremental proceeds to repay more expensive existing debt.”
Despite outflows from emerging markets in the wake of the normalisation of US interest rates as well as synchronised growth in the US, Europe and Japan for the first time since the Global Financial Crisis, there have been net cumulative inflows both to the stock market as well as the rupee denominated Government Securities market.
There have been foreign portfolio investments in equity, through primary and secondary market investment in the Colombo Stock Exchange to the tune of $ 9. 6 million to-date in 2018. In 2017, inflows amounted to $ 278.5 million.
Net inflows into the Government Securities market amounted to $ 6.05 million so far this year. In 2017, net inflows amounted to $ 441 million. FDI flows of $ 1.9 billion in 2017 were an all-time record, albeit from a low base.
However, the Central Bank noted that to build on these positive sentiments it was essential for the reform agenda set in motion by the Government to be fast-tracked.
“It is imperative to build upon this by persisting with sound macroeconomic policies: fiscal consolidation, prudent monetary policies and a flexible exchange rate which supports the competitiveness of the economy. This 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,” the statement said.
“Political stability is essential for sustained growth and development.”