Former CB Governor Dr. Indrajit stresses the need of quality reserves

Former CB Governor Dr. Indrajit stresses the need of quality reserves

6 March 2021 07:59 am

The Government has to focus on creating quality reserves by reducing the amount of inter-governmental financial arrangements, including swaps, and focus on structural reforms to improve Sri Lanka’s debt sustainability over the next five years,

This was emphasised by eminent economist and Sri Lanka’s former Central Bank Governor Dr. Indrajit Coomaraswamy who was instrumental in restoring credibility and strengthening foreign reserves of the monetary regulator badly affected by the bond scam during the previous regime.     

Dr. Coomaraswamy, participating in an event online  organised by think tank Verite Research titled ‘Public Finance Lounge’ noted that  the Government and the Central Bank were dealing  with current debt challenges worsened by COVID-19 by focusing on swaps and other short-term borrowings.

However he pointed out that, a long-term strategy was needed to restore market confidence and create economic stability. 

The Government has gained a US $ 400 million swap from India in early 2020 to prop up reserves, but had to repay it in February, reducing reserves to about $ 4.4 billion.

It is also in discussions with China for a $ 1.5 billion swap arrangement and was also seeking a further $ 1 billion from India on a similar arrangement. 

The funds are seen as crucial to prop up Sri Lanka’s rapidly dwindling reserves and meet about $ 4.3 billion debt repayments due in 2021. The country also has to repay an average of about $ 4 billion for the next five years. 

Dr. Coomaraswamy, opined that while Sri Lanka’s options for raising forex was limited given the multiple ratings downgrades in 2020 and other challenges, when the time came to re-look at rebuilding reserves in 2022, attention should be paid to more stable sources. 

“Given the risks in our economy, whenever there are minor domestic-driven or changes in risk appetite in the global economy, money just flies out he said.

This is completely out of our control. It’s referred to as a “paper tantrum” and money just goes out and it puts enormous pressure on the exchange rate, he added.

Pulling in more and more swaps and inter-governmental financing could end up shoring up more problems in the future. We need to focus on the quality of reserves,” he added. 

Dr. Coomaraswamy pointed out during 2015-2018, the Central Bank had gone to international capital markets to raise about $ 4-$ 5 billion, largely to retire short-term swaps and improve the quality of reserves. 

He pointed out that even though Sri Lanka had $ 8 billion of reserves around 2014, there was significant exposure to comparatively volatile inter-governmental financing that the Central Bank had worked to reduce.  

The former Governor also warned over-dependence on swaps reduced the scope for autonomous monetary policy, recalling that in 2018, even though the environment was conducive to loosening policy rates, the Monetary Board had to be careful to do so, as there was potential for funds to exit in large amounts.