Let’s continue along the conservative path we have carefully chosen’

In 5 years, we will be in a much better position in terms of debt sustainability’

by Sanath Nanayakkare

Central Bank Governor Dr. Nandalal Weerasinghe insisted Friday that the general public who elect governments has a responsibility to be mindful if the governments elected by them deviate from the path of stability because it could adversely affect all stakeholders of the economy and communities across the country.

“Stay mindful about any deviations from the current path of debt sustainability, recovery and growth targets, and if you see any veering off course, it is your responsibility to get them back on the right track,” he said.

The Governor made this remark on Friday while delivering the keynote speech at the CFA Society Sri Lanka CEO Forum.

Speaking further he said,” We have been able to achieve some stability in the short term. And next important step in completing the stabilization programme is to complete both Domestic Debt Optimization (DDO) and external debt restructuring and signing a deal with external creditors – both commercial and bilateral creditors.

We hope we will be able to complete it somewhere in September –October 2023, and complete the first review of the IMF programme. Once that is done, the most difficult path on short term reforms will be over. Then we have to get ready for medium term growth and recovery, stable exchange rate, higher reserves, robust policies and growth enhancing structural reforms. That is the only path we have to pursue.”

“Some people are concerned whether there would be a second DDO. If we deviate from the current path there could be a second DDO or even there could be another default or bankruptcy. The government has committed itself to 0.3% primary surplus through prudent fiscal policies. If Sri Lanka turns back and moves backwards to -6% primary surplus, then there would be another debt unsustainability issue and would need another DDO.

As things stand now, Sri Lanka doesn’t need another DDO because the current one is strong enough and consistent with the targets to restore debt sustainability subject to other policy elements moving in parallel; namely, fiscal policy, structural reforms and the envisioned growth path. In my view, this DDO and debt sustainability is a conservative path we have rightly chosen and we need to be consistent with it.”

“The current trajectory is targeted on a 3% growth rate. But Sri Lanka has the capacity to grow its economy by about 5%. So if we are able to exceed that growth target, we would be better off than we think, and we won’t have to wait for 10 years to achieve debt sustainability.

In five years, we will be in a much better position in terms of debt sustainability. Given the outlook is conservative, we have room to go higher in terms of growth , expected inflation targeting outcomes and building foreign reserves. The authorities have to maintain a prudent fiscal policy for which the government has committed itself. Because this is the only path, I hope they will continue on it.

Then we should be able to give relief to the people earlier than expected. But if we move on a different path, and go back to 4-5% deficit, then things would be worse. There is strong commitment on the part of both monetary and fiscal authorities to keep to the original programme. We need the support of the private sector and the general public also for this strategy to come to fruition,” Dr. Weerasinghe said.