Central Bank Governor says: H’tota deal will stimulate economy

Major plus for country’s reserves:

Good news if deal is finalised by this year:

The Central Bank has stated that the Hambantota Port deal was important to cushion and absorb possible shocks to our ailing economy.

“Hambantota is a major plus for our reserves, if it does not go through, the people will have to bear difficult burdens in the second quarter of this year,”Central Bank Governor Dr. Indrajit Coomaraswamy said. The Central Bank Governor was addressing a media briefing at the Central Bank yesterday.

He added that it would be good news if the deal was finalised by this year.

The deal, according to Dr. Coomeraswamy will bring in USD 100 million at the time of signing, USD 300 million three months later and USD 700 million, six months after that.

“This year at least we could get USD 400 million if the deal goes through,” the Governor who is facing a difficult situation in managing the country’s dwindling foreign exchange reserves said.

The government was earlier successful in acquiring a USD 1.5 billion IMF loan last year to avoid a balance of payment crisis and this year it raised USD 1 billion in development bonds. But according to Deputy Governor, Dr.Nandalal Weerasinghe, this has not been sufficient,

“The IMF money will only be given to us over a period of three years with each tranche at USD 160 million. We have already got two and we expect the third in June. But,from 2019 onwards, several international and domestic sovereign bonds are set to mature and this is a problem”, said Dr.Weerasinghe.

“The additional Chinese money thus will help us manage our short term liabilities using non-debt creating inflows. It will also help the Central Bank manage its foreign reserves,”he added.

In 2016, the government had, according to the Central Bank managed the Budget deficit well and decreased it to 5.3 percent though the target was 5.4 percent. But come 2017, the government has USD 2.6 billion in total in debt servicing payments.

“We have already paid USD 700 million of that money in the first quarter, and only has USD 1.9 billion to pay”, Dr. Weerasinghe said.

This USD 1.9 billion is expected to be paid through the issuance of sovereign bonds worth USD 1.5 billion soon, the raising of a syndicate loan of USD 450 million with reasonable chance that it would go up to USD 700 million and a USD 200 million loan from the China Development Bank,

“This would raise USD 2.4 billion and help us meet our obligations for the year but that is a thin margin. Any external shock, like an oil price increase will push us into crisis”, Dr.Coomeraswamy said.

In addition to debt, the government also needs to increase its foreign reserves to USD 7-7.5 billion by this year, at present it lies at USD 5.1 billion,

“USD 5.1 billion is not a level we are comfortable with. This is less than three months of import cover and in a highly volatility global economy and climate change, we cannot operate with reserves under three and a half months. We have to get to USD 7-7.5 billion”, explained Dr.Coomeraswamy and added that ideally the economy would do better if we had foreign reserves of USD 10 billion as a bumper to meet all external shocks to the economy.

“If we had the USD 1.1 billion from Hambantota, we can comfortably get to our target. No point in borrowing to pay off debt. We need non-debt creating money like the Hambantota Port to pay off domestic and external debt,”the Governor said.

“We have to get out of this hand-to-mouth existence”, he added and said that in the mid and long term, the government would have to take measures to improve its exports and build confidence among domestic and international investors if we are to avoid living from one crisis to another.