Sri Lanka’s troubled economy will see its worst contraction ever (negative growth) with many jobs lost due to challenging conditions here and abroad, Central Bank Governor Dr. Nandalal Weerasinghe said this week. “The economy will go through a major contraction this year, the worst ever with 3 to 6 months of minimum economic activity, It [...]

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SL’s economy will struggle through a contraction this year

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Sri Lanka’s troubled economy will see its worst contraction ever (negative growth) with many jobs lost due to challenging conditions here and abroad, Central Bank Governor Dr. Nandalal Weerasinghe said this week.

Dr. Nandalal Weerasinghe

“The economy will go through a major contraction this year, the worst ever with 3 to 6 months of minimum economic activity, It will be the highest contraction level and sharpest contraction ever,” he said. The Governor was speaking at the Press Club event organised by the Sri Lanka Press Institute on Monday at the Hilton Colombo on the topic “State of the Economy and Talks with the IMF”. Hilton Colombo is the host hotel of the Press Club.

He said Sri Lanka was facing its worst economic crisis since independence. “There is not only an economic crisis but also a political and social crisis. How do we deal with this in the future?” he asked.

The level of foreign exchange liquid reserves was enough to meet a couple of weeks for import expenses while facing foreign debt payments of $6 billion per year over the next few years.

“Although we are keen to make these repayments, our ability to do so is not there. We are seeking some relief so that we can make payments under an agreed schedule with our creditors,” he said.

Due to the proposed deferred debt payments, Sri Lanka can save $2.5 to $3 billion this year but in six months a deferred payment scheme after consultations with its creditors needs to be in place. It was announced this week that Sri Lanka has hired advisors Lazard and Clifford Chance for debt restructuring.

Section of the audience. Pix by Indika Handuwela

“Since the commodity boom in the 1960s, we have been running budget deficits. Today we are struggling to find forex and financing day to day needs like fuel, medicine, etc,” he said adding that they hoped to secure emergency funding from World Bank and ADB by suspending or postponing non-priority project and repurposing those funds for fuel and gas.

The Governor said they had no choice other than making decisions unfavourable to the public. “We don’t have a choice,” he admitted.

While normally an IMF programme would have taken just three months to finalise, this time it would take six months and is complicated because a debt repayment schedule, after discussions with creditors, has to be finalised first. Sri Lanka has announced a temporary debt repayment default.

International Sovereign Bonds (ISBs) represent 35 per cent of the foreign debt and the highest component. “The challenge today is how do we manage our debt (and raising bridging finance) until we get these IMF funds,” he said.

After finding short to medium-term bridging finance as things get worse, the next big challenge is how to get the economy on track which will happen only 12 months from now. Inflation will rise to 30-40 per cent.

“The poor and the vulnerable will suffer immensely and find it difficult to live with their incomes. Many people will go unemployed particularly in SMEs. However the export sector will grow, that is our saving grace. This will give us some cushion, some stability,” he added.

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