Many countries squander their peace dividend, but not Sri Lanka. Macro-economic fundamentals are now benign and there’s a huge infrastructure drive, says Governor of the Central Bank, Ajith Nivard Cabraal in an interview with the Finance Asia on Dec.01.
Speaking with regard to ratings upgrade, he says, “We should be at least two notches higher. We’ve never defaulted on a single loan in our entire history and the direction we’re moving in is very clear. If you take these factors into consideration, I don’t think we’ve been given our due place. And it’s unfortunate because certain investors can’t buy our debt because of the rating ceiling”.
Following are the excerpts from the interview :
There have been some big improvements in the Sri Lankan economy since the war ended in 2009. How was that achieved?
Many countries squander their peace dividend, but not Sri Lanka. Macro-economic fundamentals are now benign and there’s a huge infrastructure drive. We’ve had to take some tough measures though. Inflation had to be tamed and it took at least three years before people began to realize it would stay that way. Sri Lanka had been a high inflation country for a very long time and changing that mindset has been one of our most important achievements.
From an outsider’s perspective, one of the most striking changes has been the advent of good roads.
Yes. We’ve planned to build the highways so they can be widened in 10 to 15 years and will last for a century, not just a couple of years. It’s all been thought through very carefully and it’s not just at the national level either. Sri Lanka has 14,000 villages and they’re all now getting proper tar roads as well.
When I last spoke to you in 2009 you were forecasting growth around the 8% level. Is that still your aim?
This year will be 7.8% and next year about 8%. We’re very comfortable with that level … We’re confident we can sustain current levels for the foreseeable future and that gives investors a lot of confidence. By 2020 we should be a $165 billion economy, up from $70 billion now.
The debt rating agencies say you need to improve revenue generation to bring down the budget deficit.
I think they’ve got things a little mixed up. They say we have to bring down the budget deficit and increase revenues. Well, we are bringing down the budget deficit and I think that’s good enough by itself. Yes, revenues have not been increasing as much as they might but expenditures have been decreasing. It’s wrong to focus on just one indicator, which is a component of a much bigger indicator, the budget deficit.
Will you meet this year’s 5.2% deficit target?
Yes, and we’ve been spot on for the last four years. Next year it will be 4.6%.
The rating agencies also focus on your high level of debt-to-GDP.
There has been a very clear downward trend. This year it will come down to 74% and next year we’re targeting 70%. By 2020 we expect it to be below 60%. The rating agencies have been rather slow reacting to improvements in the Sri Lankan economy, but investors have not taken the same view. They’ve rewarded our consistent track record by enabling us to reduce our overseas borrowing costs.
A decade ago the Philippines were Asia’s most active overseas borrower, but it has since really ratcheted its costs down by raising more debt domestically.
I think that’s a sensible way to go and in the next few years you should see a similar trend in Sri Lankan debt management. Our current debt mix is about 45% domestic debt and 55% foreign, with concessionary loans accounting for about 60% of the foreign part. There’s also a 12.5% cap on foreign investment in the domestic Treasury bond market. As local capacity increases, we may be able to reduce that further so we’re less dependent on what’s happening in the outside world.
How important is the Renminbi in your reserve's mix?
We’ve been investing in the renminbi for the last six years and the amount has been increasing. It was quite modest to begin with but there’s a lot more interest in the currency now. And this will continue…
In September you set up a Rmb10 billion swap line with China.
This will enable us to draw down any time we wish to. It’s an additional buffer, which is very helpful given how much trade we do with China. It should hopefully send a good signal to outside investors as well as the rating agencies if they’re able to pick that up.
You’re obviously unhappy with your B+/B1/BB- rating. What should it be?
We should be at least two notches higher. We’ve never defaulted on a single loan in our entire history and the direction we’re moving in is very clear. If you take these factors into consideration, I don’t think we’ve been given our due place. And it’s unfortunate because certain investors can’t buy our debt because of the rating ceiling.
They seem fixated by your debt-to-GDP ratio, which is twice the double-B rating average.
They seem to fixate on a different indicator every year. They’re entitled to their opinion and we respect that. But at the same time the most important thing should be the trend. A country can have a low debt-to-GDP ratio, but be on a rising path. We’re going in the opposite direction.
Has Sri Lanka been upgraded since the end of the civil war?
Actually, we had a funny situation a few years ago where we were on positive outlook, but it was reduced to stable. Moody’s had the choice of moving us up or down, but preferred to go down. There’s been no acknowledgement of the changes we’ve made.