SL needs immediate external financing, not too much borrowing, say experts
While Sri Lanka is grappling with the recovery from the economic crisis and seeking loans from various countries and (possibly from) the IMF, the country must focus on a consistent fiscal architecture including international capital market access to build up external financing such as FDI’s.
The country does not need more and more short term financing, certainly not Sri Lanka, rather external investments, said Anoop Singh
former Director, Asia Pacific Department – IMF.
Mr. Singh made these remarks during a webinar organised by the Pathfinder Foundation on Thursday. The title of the webinar was ‘Building Sri Lanka’s Fiscal Architecture’.
Mr. Singh said, “Sri Lanka needs a consistent fiscal architecture including market access. When I say market access, we should not borrow too much like we have done in the past. Market access means building external financing, preferably FDI’s. The nature of market access is very important.”
“What the country needs at this juncture is not more and more short term financing, certainly not Sri Lanka. It needs to build an inclusive framework that is crucial, so that the social needs are met consistently over the medium term.,” he noted.
Former Central Bank Governor, Dr. Indrajit Coomaraswamy who is also a Distinguished Fellow at Pathfinder Foundation elaborated on the importance of Sri Lanka having a credible fiscal framework.
He said, “Sri Lanka must focus on the importance of having a credible fiscal framework so that one can have market access. This raises a question as Sri Lanka is a middle income country, how important is it to raise its
rating and have market access.”
“There is a feeling that we are over exposed to markets, to our ISB’s and so on. If you substitute ISB’s with short term SWAPs and other types of lending that may not be as attractive that it can get us very far. My understanding is that we do not have sufficient savings which forces us to access foreign savings. Once you don’t have access to concessional money in the form of ODA (official development assistance), you have markets that you have to turn to,” he added.
He emphasized, “Borrow, but make sure you borrow in such a way that you roll over your capital and service the interest. In the process you improve your macroeconomic fundamentals along the way so that the terms on which you are able to borrow get better. In the meantime the rating goes up and that is how you are able to access foreign savings through international capital markets in a sustainable way.”
“By servicing the interest, it improves the terms and reduces the capital requirement. Ideally you run primary surpluses in your budget and reduce the borrowing requirement. Increase the capacity of service debts through FDI, exports and so on.”
“Sri Lanka needs to have a strategy to do that as well side-by-side with a medium term fiscal framework. As a middle income country we probably have no option but to deal with rating agencies and capital markets,” noted Dr. Coomaraswamy
He also stressed the fact that Sri Lanka’s targets were too ambitious. “We missed the early targets and the will to stick with it disappeared. What bureaucrats and governments have probably failed is that the politicians and public do not understand the link between inflation and weak fiscal policy.”