National Economic Council (NEC) Secretary General and Chief Economist of the Government Prof. Lalith Samarakoon yesterday assured that the Government would honour all its contractual debt repayments for this year and the next.
He was addressing a seminar on ‘Sri Lanka’s Economic Challenges in the Year 2019,’ at the Galadari Hotel along with Central Bank Senior Deputy Governor Dr. Nandalal Weerasinghe and Professor at the Faculty of Economics University of Kelaniya Prof. Ajitha Tennnakoon.
He said that despite the country’s economy also being badly influenced by global conditions such as a volatile international market, further increasing of US Federal Reserve rates and slow growth rates in advanced economies next year, Prof. Samarakoon explained that the Government regardless of political situation had already made arrangements through external credit lines and borrowings to repay its debts which would average USD 5 million each year for the next five years.
“We have USD 30 billion of foreign debt and USD 32 billion of domestic debt to repay,” the Professor said.
The Chief Economist, however, warned that the Government was looking at a tough year ahead in 2019.
Dr Weerasinghe and Prof. Samarakoon highlighted the need for political stability in the country to prevail if the country is to have a better economic outlook,
“We have to go for more borrowings to repay our loans but with the current downgrading by Moody from B1 negative to B2 stable, this means that we would have to pay higher risk premiums of at least 5 per cent (normally 3 per cent) at international bond markets,” Prof. Samarakoon said.
He said the issue would be the country’s persistent twin deficits; the Budget Deficit (5.5. percent) and Current Account Deficit (2.5 percent) which remain worryingly high and are expected to remain so in the foreseeable future.
“But as other world economies are expected to have decreased economic growth rates in 2019, this would have a spillover effect on our economy. Emerging markets have already declined by 13 per cent this year,” Prof. Samarakoon said. He said that flight of capital from our stock market would also increase next year as US Federal Interest rates increase and home markets become more attractive than Frontier and Emerging markets.
On the positive side, however, oil prices have declined sharply in the last two months with Brent Crude Oil prices falling from USD 86 per barrel to USD 59.39 at present. The government as a result reduced Petrol and Diesel prices by Rs 5 per liter yesterday.
Prof. Samarakoon noted that whilst this was positive for countries like Sri Lanka, it was also indicative of slow economic growth around the world, which is now needing less oil for development.
“Oil prices may have bottomed with slight upturn going forward,” Prof. Samarakoon said.
The economists stressed that short term solutions would not resolve the current crisis and that eventually the Government would have to roll out a growth oriented strategy to overcome the current structural problems in the economy.
Dr.Weerasinghe said the Central Bank alone could not control inflation and monetary policy without the Government adopting better fiscal policies to increase growth, increase foreign earnings and reduce fiscal deficits.
“From 1977 to 2009, Governments have maintained on average a fiscal deficit of 9 per cent every year but that was made possible only because of borrowings. We cannot address the issue of currency depreciation without addressing the current account and fiscal deficit issue,” the Senior Deputy Governor said.
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