The government could have considered using the USD foreign reserves to defend the rupee, if not for the humongous Rajapaksa debt trap, Finance Minister Mangala Samaraweera said.
He told Parliament that the government had to pay USD 4.5 BN in 2019 and 2020, and 80% of this has been taken under the Rajapaksa regime.
“An approach advocated by some of the MPs in the Opposition suggest that the Central Bank should defend the currency and prevent the currency depreciation by going against market forces. The only way to defend the currency is for the CBSL to sell its hard earned US Dollar reserves and buy rupees from the market to artificially prop up the value of the rupee,” Minister Samaraweera said.
“This might have been possible if we did not have to pay USD 4.5 billion debt repayments in 2019 and a similar amount further in 2020. Over 80% of these debts have been taken by the Rajapaksa regime.We are now properly managing and repaying their debts.We will then be able to secure this country from Rajapaksa’s debt trap.If we sell our foreign reserves we will be taking the same road taken by Turkey and Argentina which we cannot afford,”Samaraweera said.
The Minister also pointed out that Sri Lanka has taken all appropriate policy measures to provide macro-economic stability to ensure the support for the capital accounts and the balance of payments and measures to control excessive import growth in the current account of the balance of payment.
“It is imperative that we build the safe guards and resilience to be able to meet such volatility and further consolidate the macroeconomic facility.The government has taken appropriate steps to build our safeguards. Throughout 2017, the CBSL made a conscious effort to build foreign exchange reserves purchased from the market instead of the old practice of borrowing from reserves. Accordingly, reserves reached a record of USD 8.6 bn by the end of August 2018. The government has also achieved a primary surplus in the Budget 2017,” the minister said.
Minister Samaraweera said that between January 1, 2018 and the September 18, 2018, the SL rupee has depreciated by 7.4%. “During the same period, the Indian rupee has depreciated by 13.5 %. The Pakistan Rupee by 12.1 %. Indonesian Rupiah by 9.5%. Even the strong Russian economy, the Rouble has depreciated by 18.2% and 24.8% in Brazil. Turkey and Argentina are facing a genuine crisis due to depreciation.The Sri Lankan Rupee has depreciated by a 7.4%. But in the next three weeks, it will depreciate more,” he said.
The Minister pointed out that Sri Lanka is not the only country subjected to the phenomenon of capital moving out of emerging and frontier market economies. “If we are to remain integrated with the global economies and sell our exports and engaged in capital markets we will have to be exposed to such volatility” he added.
Speaking further, the Minister pointed out the currency depreciation does not necessarily mean that a country cannot attain economic growth. “Vietnam’s Rupiah is still depreciating at a much faster higher rate that Sri Lanka. According to these ‘economic pundits’ Indonesia should also be a basket case. But as we know in 2017 Indonesian GDP reached USD 01 trillion and real GDP growth was over 5 percent.” he pointed out. The Finance Minister said the primary determinants of the demand for currency are export and import of goods and services and net capital flows. In SL case, these basic indicators remain positive and we are moving in the right direction,” he said.
“Import growth was seen primarily in small size motor vehicles which were underpriced in the local market. In the first six months of 2018, imports increased by USD 1300 MN of which 70 per cent was contributed by the increase on imports of fuel and personal vehicles. The government promptly took measures to address both sources of import growth that were putting pressure on the currency. Previously, a minimum tax was imposed on motor vehicles up to 1000cc engine capacity. A market determined fuel price was introduced which curbed the excess demand for imported fuel. It is clear that timely preventive measures deter measures were taken by the government and thus far these measures have been successful in curbing excess import growth,” he said.
The Minister said the normalization of US monetary policy has been a major factor affecting global financial markets.
“After the finance crisis in 2008, the US interest rate dropped to record lows and investor capitals left the US and advanced economies in search of higher returns. As the US economy recovers, the federal reserves has been increasing the interest rates which has caused global investors to uplift capital from emerging markets like SL and return capital to the US. Naturally this has moved capital movement out of many emerging economies putting pressure on their balance of payment and causing currency depreciation. Sri Lanka too has experienced foreign investment in government securities moving out and foreign capital leaving the equity markets. Similar trends have been seen among all emerging and frontier market economies,” the Minister said.