Sri Lanka’s foreign exchange reserves have fallen to little more than enough for six weeks of imports. And Japan, traditionally the island’s biggest donor, is cutting aid globally.
But while local economists say the situation is critical government will inevitably have devalue the rupee by 20% this year or accept a conditions-laced bailout package from the IMF, the Central Bank is adamant neither is necessary, the Sunday Times reported.
Instead, the government is to launch a campaign on February 4, Independence Day, to attract Sinhalese expatriates to invest in Sri Lankan treasury bills and bonds.
The Sunday Times quoted a top Colombo economist as saying foreign reserves of around 1.5 months worth of imports was precarious and immediate solutions needed to be found.
“Any level below two months is worrying while three months is the acceptable level,” he said, adding that even if tea prices rise and oil prices continue at low levels, petrol bills have to be paid (at least $2 billion a year) while the CB will be compelled to eat into the depleted foreign resources to defend the rupee in the money markets.
Another economist said Japan, Sri Lanka’s largest donor, was cutting aid globally.
Sri Lanka’s overall balance-of-payments was negative, which the CB was hiding from the public by not disclosing the (correct) figure, according to Dr Muttukrishna Sarvananthan, Principal Researcher of the Point Pedro Institute of Development and currently Fulbright Visiting Research Scholar in the US.
He however feels a depreciation of the rupee at this moment is too little too late and says approaching the IMF is the only realistic option.
The last time Sri Lanka got an IMF standby credit facility was in 2001 which was required to buy costly military equipment after the Elephant Pass military camp was taken over by the LTTE, and due to high oil prices. Last week Elephant Pass was re-captured by government troops.
Most economists contend that the government is left with few options – either devalue by 20%, seek an IMF package or enforce import controls similar to the 1970-77 era, the Sunday Times said.
However, currency dealers told Reuters the central bank called a meeting with bank treasuries on Monday to assure them the rupee will not be devalued and to explain plans to build up reserves and meet its external borrowing needs this year.
Economists and exporters say the rupee should be depreciated to about Rs 128-130 in relations to a US dollar.
It is now around Rs 114, after a marginal float of the rupee some weeks back by the CB. The rupee hit an all-time low of 114.15 a dollar on Jan. 5, while it hit a life closing low of 113.85/114.00 on Friday, Reuters said.
However, Nandalal Weerasinghe, chief economist at the central bank, confirming the meeting with bankers, told Reuters the Times’ report was false.
"There is no necessity for central bank to devalue the currency by 20 percent and this is an erroneous, politically-motivated news report," he said.
The current reserves position is similar to 1975-76 during the controlled economy of the Sirima Bandaranaike regime, when however there weren’t much imports, according to a retired World Bank economist.
However, Governor Ajith Nivard Cabraal said there was no cause for alarm and thus the need for IMF support did not arise. Instead the government would turn to Sri Lankans abroad, he said.
“The general assessment from our envoys is that with interest rates falling and a patriotic feeling amongst [Sinhala] people, there is a lot of interest to invest,” Mr. Cabraal told the Sunday Times.
“The Tamil diaspora also wants to invest in the north and east,” he said.
The campaign to raise up to $500 million this year will be launched on February 4, Independence Day, in North America, Europe, Asia and West Asia, The Sunday Times reported.
Teams led by CB Deputy Governors, Asst’ Governors and other CB officials along with the six lead banks will go on roadshows across the world with the initial phase in February.
The campaign will take teams to the US and Canada; Qatar & Dubai among others in West Asia; Italy, Germany, Switzerland, Norway, Netherlands and the UK in Europe; Singapore, Malaysia, Korea and Japan in Asia; and Australia and New Zealand.
