ECONOMYNEXT – Sri Lanka is managing imports without “bridging finance”, Central Bank Governor Nandalal Weerasinghe has said, as the balance of payments went through a correction with declining private credit.
“What I can say now is that even without the bridge funding that we’re running now compared to when we had that bridge funding, it was obviously helpful,” Governor Weerasinghe told reporters after the monetary policy decision in august
“But now, even without the bridge funding, we are managing the situation.
“I’m not too concerned about whether this money comes in or not. We have our own management system and we can manage with our exports and remittances.”
“We can finance the import requirements without much difficulty.”
At one point, Sri Lanka was trying to secure between US$4 billion and US$6 billion in “bridging financing” amid a severe foreign exchange shortage resulting from liquidity injections and high domestic credit.
However, Governor Weerasinghe had allowed interest rates to rise and private credit has slowed sharply, reducing investment spending and imports.
There is also an attempt to reduce credit to the State by increasing taxes.
Weerasinghe had also urged an increase in Ceylon Electricity Board tariffs to reduce its borrowings from state-owned banks. The Public Service Commission raised prices last month.
CPC is based on a bi-weekly or monthly pricing formula.
Imports from Sri Lanka, curbing market premiums have fallen in step.
Bank credit, especially if refinanced with central bank credit, causes foreign exchange shortages as holders of the new rupees chase non-existent inflows.
However, the central bank is still intervening for some transactions with ACU dollars donated by India. Sri Lanka also needs to settle the multilateral debt, despite the arrears.
Sri Lanka hopes to finalize an agreement with the International Monetary Fund later in 2021. The IMF does not give money until a country manages imports at current inflows.
Under a Net International Reserve target of an IMF program, a central bank is expected to save some money from current inflows, or generate some foreign exchange, after paying for imports.
On the other hand, bridging or other financial account inflows lead to unsustainable imports and larger current account deficits, analysts say. (Colombo/28/August/2022)