In a bid to boost foreign inflows, crisis-hit Sri Lanka is banking on high investments, remittances, and tourist arrivals, Cabinet Co-spokesman Minister Ramesh Pathirana said as imports hit a 17-month high in July, with money printing boosting credit and creating forex shortages.

Sri Lanka is facing a severe external payment crisis with revenues falling and expenses continuing to go up, amid a locked-down economy brought about a renwed bout of coronavirus. Finance Minister Basil Rajapaksa told parliament last week as money printing triggered forex shortages and made it difficult to repay foreign debt

Central Bank credit to the government or printed money grew 157 percent to 1.4 trillion rupees inserting new rupee reserves into the banking system to drive unsustainable loans and imports, pushing outflows above inflows of dollars and putting pressure on the rupee.

Private credit grew 14.9 percent to 6.6 trillion rupees in the year to July 2021, and government borrowings from the banking system outside of the central bank soared 26.7 percent to 4 trillion rupees.

Despite import controls, credit drove imports to a 17-month high of 1.7 billion US dollars.

Net foreign reserves of the Central Bank were down to 10.3 billion rupees by July (about 51 million US dollars) and were on track to be negative.

President Gotabaya Rajapaksa appointed his younger brother Basil as Finance Minister in July to handle steadily worsening twin deficits in external and domestic sectors.

“There is no significant change in the policy,” Pathirana, also the plantation minister, told a weekly cabinet press briefing when asked if the government is contemplating any economic policy changes after the finance minister has identified the key weaknesses of the economy.

“Hopefully, we keep our fingers crossed and we are looking forward to receiving some investments also and foreign remittance also would be increasing in time to come,” he said.

Foreign remittance also fell, driven away after parallel exchange rates developed amid money printing. The official exchange rate is 203 rupees to the US dollar.
 
“The world as a general phenomenon is coming out of this pandemic scenario, hopefully we will get tourists to this country by November-December and we will generate much-needed dollars in the local economy,” he said.

Government revenues were below target and state spending had increased, Finance Minister Rajapaksa said.

In the six months to June, revenues rose to 714 billion rupees from 663 billion last year, but were 20 percent below 2019, before tax cuts were made for stimulus. In the first six months, only 35 percent of the projected 2,019 billion rupees of revenues were collected.

Sri Lanka has run a balance of payments deficit of 2.755 billion US dollars up to July 2021, official data show, a record high, as historically high levels of liquidity, was injected to expand unsustainable credit, boost imports and also sterilize debt repayments.

The government was rationalizing spending, by a hiring freeze and cost management, Minister Rajapaksa told parliament.

In August foreign reserves recovered to 3.5 billion rupees US dollars from 2.8 billion helped by a 150 million US dollar swap from Bangladesh and around 800 million US dollar special drawing rights allocation from the IMF. However, on a net basis, the country has almost zero reserves.

Forex shortages came despite record exports.

“Fortunately, our exports have gone up a little in all sectors including apparel, plantation and also other sectors,” Pathirana said.

President Gotabaya Rajapaksa has appointed former state minister Ajith Nivard Cabraal to run the central bank with effect from Wednesday in a bid to fix the economic problem.

“I will concentrate on stability first and growth,” Cabraal told EconomyNext.

Sri Lanka has rejected an International Monetary Fund bailout.

Parliament also passed a law last week to facilitate Sri Lankans to bring their stashed cash from foreign countries with just a 1 percent tax and invest in the country while ensuring the anonymity of such people.

(SAM)