Business

Sri Lanka’s macroeconomic policy setting: Cohesion or confusion?

Published

5 years ago

2021/08/31

By Dushni Weerakoon

The hike in policy interest rates by the Central Bank of Sri Lanka (CBSL) in August 2021 marks a shift from stimulus to exit strategies in the pandemic era. Such recalibrations globally are focused on how to tackle the historically large debt-to-GDP ratios that the COVID-19 pandemic leaves in its wake. At end 2020, advanced economies (AEs) on average had amassed debt to the tune of 120% of their GDP with emerging markets economies (EMEs) trailing some distance at 65% of GDP. As the spotlight moves, the full impacts of the macroeconomic policy measures, hitherto obscured by the urgency to deal with the health crisis, are now coming under greater scrutiny.

Sri Lanka’s debt metrics make an orderly exit more difficult

Many countries, especially AEs, exercised their ‘monetary sovereignty’ to create and print their own money to support stimulus efforts. They have done so through coordinated monetary/fiscal policies – i.e. using monetary policy to keeping borrowing costs low while fiscal authorities provide back-stop assurance. Some are better positioned to manage the inherent risks and conflicts of interest that are involved in this exercise. AEs have an advantage as issuers of reserve currencies with global demand and historically low interest rates; EMEs with limited exposure to foreign currency-denominated debt and holding comfortable stockpiles of reserves are less exposed to disruptive tail events.

Such countries can bring down their debt ratios if they are able to maintain nominal GDP growth persistently above the average interest rates that they pay on their debt – i.e. the growth-corrected interest rate (r-g) whereby countries can run modest primary deficits and still have a stable or falling debt-to-GDP ratio.

Sri Lanka is not similarly positioned. Its debt metrics point to high vulnerabilities – a high debt-to-GDP ratio of 101% of GDP, large exposure to foreign currency-denominated debt, and a hefty foreign debt repayment schedule. Under these conditions, the threat from exercising monetary sovereignty was always self-evident. A depreciating currency, notwithstanding distortionary controls on imports and capital flows, worsens the debt vulnerabilities.

Domestic and foreign debts are hardly similar. Given Sri Lanka’s debt metrics and the fundamental economic imbalances that have generated them, simple accounting identities do not always offer very plausible solutions. If the exchange rate depreciates, it adds to the real value of outstanding debt, relative to the size of the economy, even if interest rates remain modest. Further, shocks like COVID-19 raise risk premia, and marginal borrowing costs can rise suddenly and sharply, cutting countries abruptly out of financial markets.

Crucial to instill and retain macroeconomic policy credibility

Short of distortionary measures such as inflating debt away or maintaining an overvalued currency, a primary surplus is needed to stop the public debt-to-GDP ratio from rising and an even larger surplus is needed to reduce it. Improving the primary budget balance calls for tax increases or public spending cuts that are unpopular and have upfront costs. Given the government’s unwillingness to go down this path, households and firms will be required instead to bear the cost through higher interest rates that will affect their consumption and investments.

Higher interest rates in this instance will also not ‘pull in’ foreign capital to firm up the exchange rate given the risk premia on the currency front as depreciating pressure deepens. With reserves in hand to cover barely two months of imports, the forex market will continue to face volatility and instability until a steady stream of capital inflows, beyond short-term swaps, emerge. Until such time, a depreciating domestic currency will increase the interest burden as calculated in that currency. If debt servicing interest rate costs are pushed persistently above the economic growth rate, Sri Lanka’s debt burden will grow steadily even in the absence of new borrowing – a context sometimes called a ‘debt spiral’.

Without a clearly spelt-out debt sustainability path, Sri Lanka seems to be placing all its bets on foreign direct investment (FDI) to ease external pressures and revive economic growth. For a successful outcome – i.e. productivity gains to drive long-term growth – the type of FDI matters. The more desirable is efficiency-seeking FDI, but this is also harder to attract. For now, a policy environment of import curbs and capital controls is more likely to see strategic-seeking infrastructure-led FDI. The latter runs the risk of switching resources to non-tradable sectors – reducing the availability of external financing over the longer term – and the prospect of a short-lived growth burst as before in the post-war years. Crucially too, the sole reliance on FDI leaves Sri Lanka at the mercy of developments beyond its control.

Rather, efforts to attract FDI should be coupled with building effective policy strategies that instill and maintain credibility. Indeed, this is all the more important as Sri Lanka appears to be firmly against an International Monetary Fund (IMF) bailout. IMF loan amounts are small and it no longer has much sway on debt relief with much of EME foreign debt held by private institutional investors and China. An IMF programme is mostly useful in firming up sovereign credit ratings and reviving the sentiments of investors. But investor sentiments can also improve if governments put forward and implement credible policy strategies. By contrast, the CBSL’s policy rate adjustment to anchor expectations, for instance, will not stick if direct financing of fiscal spending is to continue under yield control measures. Instead, market convictions on the credibility of the policy mix will drive economic fundamentals. As Sri Lanka readies to transition out of pandemic-related emergency support, some notion of fiscal and debt sustainability to anchor confidence should be the priority in Budget 2022 preparations.

* This blog is based on the comprehensive chapter on “Economic Performance and Outlook: Managing the Crisis and Promoting Recovery” in IPS’ forthcoming annual flagship publication ‘Sri Lanka: The State of Economy 2021’

Link to blog: https://www.ips.lk/talkingeconomics/2021/08/30/sri-lankas-macroeconomic-policy-setting-cohesion-or-confusion/

Dushni Weerakoon is the Executive Director of the Institute of Policy Studies of Sri Lanka (IPS) and Head of its Macroeconomic Policy research. She joined IPS in 1994 after obtaining her PhD, and has written and published widely on macroeconomic policy, regional trade integration and international economics. She has extensive experience working in policy development committees and official delegations of the Government of Sri Lanka. Dushni Weerakoon holds a BSc in Economics with First Class Honours from the Queen’s University of Belfast, U.K., and an MA and PhD in Economics from the University of Manchester, U.K.

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Business

Parliament rocked by LKR 13.2 billion NDB fraud: Systemic failure or regulatory lapse?

Published

1 hour ago

2026/04/9

Sahan Weerasooriya

Ravi Karunanayake and Bimal Ratnayake

The corridors of power in Sri Lanka’s Parliament became a theater of intense debate on April 7, 2026, as lawmakers confronted the fallout of the National Development Bank (NDB) fraud scandal. What began as a Securities Exchange Commission (SEC) disclosure has now transformed into a scathing critique of the nation’s financial regulatory domain.

Opposition MP Ravi Karunanayake took to the floor to demand accountability, not just from the bank, but from the regulatory authorities themselves. Highlighting the alarming jump in reported losses – from an initial LKR 380 million on April 2nd to a massive LKR 13.2 billion by April 6th – Karunanayake questioned how such a systemic breach could occur undetected.

“I want to focus your attention on the operations… and its supervision process,” Karunanayake told the House. “I was more shocked about what we heard at the Public Finance Committee… as there was no one to take the responsibility for detecting this earlier”.

The MP emphasised that his intention was not to trigger a ‘run’ on the bank, but to ‘purify’ oversight mechanisms, which he suggested had failed in their primary duty of early detection.

The gravity of the situation was underscored by Minister Bimal Ratnayake, who confirmed that the President has been formally briefed on the fraud. The Minister assured Parliament that the administration would take all necessary actions to ensure ‘financial sector’s discipline’ in the wake of this fraud.

Regulatory authorities have already moved to assert authority, issuing a statement on April 5, 2026, to provide oversight and maintain liquidity stability. However, the ‘appropriate regulatory support’ mentioned came with heavy strings attached as follows:

Dividend Freeze: The bank was ordered to immediately suspend cash dividends scheduled for distribution in April 2026.

Operational Curbs: NDB has been directed to restrict discretionary spending and halt all branch expansions until further notice.

Forensic Mandate: Under regulatory and board pressure, NDB is appointing an independent forensic auditor to conduct an impartial review of its systems.

The LKR 13.2 billion fraud is estimated to impact NDB’s unaudited total asset base by 0.7%. While NDB Chairman Sriyan Cooray and CEO Kelum Edirisinghe were noted for their expertise by Ravi Karunanayake, the focus has shifted toward the systemic vulnerability of the sector. As the criminal investigation and internal inquiries proceed, the primary question remains: how did a fraud of this magnitude remain invisible to the regulators until it reached the breaking point?

With the Public Finance Committee now involved, the NDB incident is no longer just a corporate crisis – it is a test of the integrity of Sri Lanka’s entire financial supervisory framework.

By Sanath Nanayakkare

Business

Ceylon Chamber of Commerce announces leadership transition

Published

1 hour ago

2026/04/9

Sahan Weerasooriya

Shiran Fernando / Perera / Alikie

The Ceylon Chamber of Commerce announces a planned and orderly leadership transition, underscoring its commitment to strong governance, leadership continuity, and long-term institutional stability.

Accordingly, Shiran Fernando has been appointed Secretary General and Chief Executive Officer, effective 8th May 2026, succeeding . Buwanekabahu Perera, who will conclude a three-year tenure at the helm of the Chamber.

Commenting on the transition, Krishan Balendra, the Chairperson of The Ceylon Chamber of Commerce stated:

“This leadership transition reflects the Chamber’s long-standing belief that strong institutions are built through continuity, sound governance, and deliberate succession planning. Over the past three years, the Chamber has been further strengthened institutionally, allowing us to move forward with confidence. The Board is fully assured that this transition will ensure stability while positioning the Chamber to meet the evolving needs of our members and the broader economy.”

Supporting this transition, institutional stability is further reinforced by the continued leadership of Ms. Alikie Perera, who serves as Deputy Secretary General, Chief Operating Officer / Financial Controller and CEO of GS1 Lanka. With over three decades of service spanning multiple leadership cycles and governance eras, including service under 16 successive Chairpersons, she has been instrumental in sustaining the Chamber’s operational integrity and financial discipline. Notably, she has played a key role over two decades in steering the Chamber’s flagship platforms, including the Sri Lanka Economic and Investment Summit (SLEIS) and the Best Corporate Citizens Awards [BCC Awards], both of which have become nationally and internationally recognised benchmarks. Her continued role provides assurance that institutional memory and organisational continuity remain firmly intact.

Business

Dialog Finance Launches Next-Generation Virtual Debit Card, Elevating Digital Payments in Sri Lanka

Published

1 hour ago

2026/04/9

Sahan Weerasooriya

Dialog Finance PLC, Sri Lanka’s leading fintech innovator, announced the launch of its Virtual Debit Card, the first in Sri Lanka to enable customers to generate multiple virtual cards for different purposes within a single app. This cutting-edge, digital-first payment solution is designed to deliver smarter control, enhanced security, and effortless everyday transactions, making online payments safer, more flexible, and fully manageable through the Genie app.

Designed for today’s mobile-first lifestyle, the Virtual Debit Card is managed seamlessly within the Genie app, allowing customers to generate multiple virtual cards tailored for specific use cases such as subscriptions, individual merchants, or shared spending scenarios. Each card offers customizable spending limits, real-time transaction tracking, and the option to delete or deactivate it once its defined use is complete. By isolating transactions across different purposes, this approach significantly enhances online payment security while providing complete visibility and control.

Issued on the UnionPay International network, the Virtual Debit Card ensures wide global acceptance for online and in-store payments. It also paves the way for future enhancements, including Tap to Pay functionality on NFC-enabled smartphones, enabling fast, contactless in-store transactions scheduled to be activated soon as part of Dialog Finance’s ongoing product evolution.

Commenting on the launch, Nazeem Mohamed, CEO & Director of Dialog Finance PLC, said, “This launch strengthens our position as Sri Lanka’s leading fintech provider. By offering multiple virtual cards, and intuitive in-app controls, we are delivering a secure, flexible digital payment experience that perfectly aligns with modern customer needs.”

The Dialog Finance Virtual Debit Card is now available exclusively through the Genie mobile app, allowing customers to instantly generate, manage, and control their cards from a single interface. This milestone further solidifies Dialog Finance’s leadership in delivering customer-centric, innovation-led digital payment solutions in Sri Lanka.

Dialog Finance PLC, a subsidiary of Dialog Axiata PLC, is a licensed finance company regulated by the Central Bank of Sri Lanka. The Company offers a range of digital-first financial solutions to individuals, businesses, and corporations, and is backed by a strong Fitch Rating of AA (lka), reflecting its financial stability, robust governance, and high creditworthiness.