Business

Constant ‘monetary financing’ had little backing from fiscal side, says Central Bank

Published

4 years ago

2022/06/30

by Sanath Nanayakkare

The majority of external obligations in the recent past were financed by sources like the Central Bank of Sri Lanka or through monetary financing, but fiscal consolidation through revenue enhancement as well as expenditure rationalization deemed necessary under such circumstances were hard to come by, R.A.A. Jayalath , Assistant Governor of the Central Bank of Sri Lanka said recently.

He said so while addressing a high level seminar held on the topic on “Confronting the Current Foreign Exchange Crisis in Sri Lanka: Lessons from Global Experience”.

“Thus, a significant amount of monetary financing by the Central bank has resulted in worsening inflation and exchange rate outcome”, he observed.

He went on to say: “In this environment, the tax cuts introduced in 2019-2020 with a reduction of VAT threshold was a grievous policy, in my view. Total impact of such a tax cut was over Rs. 600 billion and some put it at Rs. 800 billion. The resultant revenue drop was about 7.7% of GDP. The mainstream economic theory suggested such tax cuts would enhance money in circulation in the economy supporting growth in the medium to long term. The combination of pandemic-induced additional expenses and limited resource mobilization had widened the fiscal deficit. Tax cuts, low interest rates and high liquidity environment created higher demand for imports. In addition to that, the pandemic hit the brakes on tourism-related revenue which was the fifth largest inflow which had been normalizing after Easter Sunday attack in 2019. The pandemic related mobility restrictions around the world strengthened remittances via banking channels. However, this was short-lived as mobility increased after successful immunization programmes as a result of which the pattern of the flow of remittances changed. This was exacerbated by the fixation of exchange rate at Rs.200 levels”.

“Tourism brought USD 4.4 billion – 5.6% of GDP in 2019 – and it was reduced to 0.8% in 2020. Then the government decided to ban the import of agro-chemicals in April 2021 for health reasons and to promote eco-friendly sustainable agriculture. Although the transition towards organic farming seemed like an environmentally friendly sustainable step, the sudden shift was like a time bomb waiting to explode. Whatever the rational, the sudden transmission was extremely problematic due to lack of organic farming infrastructure, dependence on imported agro chemicals and lack of access to modern agricultural techniques. …….This disrupted the economy’s self-sufficiency in rice production requiring rice imports using scarce foreign exchange reserves. The nation’s external economic performance deteriorated and the current account deficit increased from 1.14 billion in January 2022 from 0.13 in January 2021.”

“When you look at Sri Lanka’s current crisis, we can’t forget the legacy the country has been carrying. Since post-independence, Sri Lanka has been a twin-deficit country except for a few years. The number of times the country has sought assistance from the IMF in its post-independence history shows the frequency of BOP challenges it faced. Today we are seeking the global lending agency’s support for the 17th time.”

“The country’s trade account was continuously in deficit. Import expenditure was almost double the exports. In the current account, it showed some relief mainly because of migrant worker remittances. But that was insufficient to cover the twin deficit. The majority of the country’s foreign exchange inflows didn’t come via non-debt creating flows like FDIs, but through further borrowings. On top of this fiscal balance or the government budget was continuously in deficit. And it was increasing due to ever-increasing commitments of the government sector. Thus the country’s primary account balance – the government budget before deduction of debt servicing expenses – was in deficit except for a few years.”

“Government revenue as a percentage of GDP was constantly on the decline since 1980s except in 2015, and 2016. Tax revenue was declining until 2015, and showed some increase in 2017/2018. But the budget deficit was significant. In 2019, it was around 9.6% and increased to 11.1% in 2020 and 2021, so both fiscal and Balance of Payments ( BOP) issues were at the heart of Sri Lanka’s macroeconomic performance constantly. In addition, heavy and continuous borrowings by the government to bridge the fiscal deficit over the years, has led to monetary policy and exchange rate management having limited effectiveness in managing the fallout of funding the fiscal gap. Subsequent to the global financial crisis and the presence of low interest rates in the developed market, Sri Lanka shifted its strategy significantly towards foreign market borrowings, exposing the country towards global credit cycles. So although we witnessed rapid economic growth, majority of them were coming from borrowed funds and at the same time they were invested mostly in non-tradable sectors or slow-revenue generating sectors.”

“This was reflected in the trade balance which was not sound and was deteriorating. The other factor that led to the rapid shift in our debt composition was when we moved to commercial borrowings, particularly after we lost access to concessional borrowings. Since we graduated to middle-income country status in early 2000, most of our borrowings were commercial borrowings. We didn’t have access to low-cost borrowings from multilateral agencies. And as concessional loans declined, the economy increasingly moved towards commercial loans mostly by way of international sovereign bonds (ISBs) and other bank and overseas borrowings. While the domestic /public debt level remained mostly stable, foreign debt became primarily the force driving the Sri Lankan economy.”

“Foreign debt to GDP ratio increased from 30% in 2014 to above 50% in 2020. Although Sri Lanka’s foreign debt to GDP ratio has witnessed a significant reduction over the past two decades, the change in the composition of high level of external debt has made the economy more vulnerable to a currency crisis in the past few years. Consequently, in 2021, the economy had net repayments to foreign creditors; therefore, the entire budget deficit was financed by domestic financing. It was kind of domestication of external obligations,” the Assistant Governor said.

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Business

PEOTV secures media rights for FIFA World Cup

Published

10 hours ago

2026/06/6

Priyan

SLT-MOBITEL PEOTV, Sri Lanka’s pioneering Internet Protocol Television (IPTV) service provider and leading digital entertainment platform, announced a landmark partnership with Fédération Internationale de Football Association (FIFA), securing the exclusive media broadcasting rights for the FIFA World Cup 2026™ in Sri Lanka.

The strategic partnership marks one of the most significant sports media acquisitions in the country’s broadcasting landscape, granting SLT-MOBITEL PEOTV exclusive rights to deliver every match of the FIFA World Cup 2026™ to audiences across Sri Lanka. Through PEOTV, PEO MOBILE, and digital platforms, football fans nationwide will have unparalleled access to the world’s most prestigious sporting event, ensuring they experience every moment of the tournament live, from the opening match to the final championship.

The acquisition of FIFA World Cup 2026™ rights represents another significant milestone in SLT-MOBITEL PEOTV’s continued investment in premium sports broadcasting. Over the years, PEOTV has built a strong reputation for delivering major international sporting events, offering customers reliable, high-quality coverage and enhanced viewing experiences through advanced IPTV technology. Viewers will enjoy the tournament in true High Definition (HD), delivering exceptional picture quality and an immersive viewing experience. Whether watching from home through PEOTV, on the move via PEO MOBILE, or through digital access points, fans can follow every defining goal and unforgettable celebration throughout the competition.

The FIFA World Cup 2026™ is set to make history as the largest edition of the tournament ever staged, with 104 matches featuring 48 nations competing across Canada, Mexico, and the United States. Expected to captivate billions of viewers worldwide, the tournament represents the pinnacle of international football and stands among the most celebrated sporting events on the global calendar.

Business

Ceylon Chamber expresses concern over new US labour-related tariffs and calls for urgent engagement

Published

15 hours ago

2026/06/6

Thilina Walpola

The Ceylon Chamber of Commerce is concerned by the announcement of new labour-related tariffs by the United States on several countries, including a proposed 12.5% tariff on exports from Sri Lanka. This development comes at a time when Sri Lanka was continuing discussions with the US following the suspension of the previously announced reciprocal tariffs and was seeking to secure a more favourable trading arrangement.

The imposition of an additional tariff on Sri Lankan exports risks undermining the competitiveness of key export sectors compared to other countries, which are at a lower rate of 10%. At a time when Sri Lanka is working to accelerate export growth, attract investment, and create employment opportunities, any increase in trade barriers presents a significant challenge. At present, key goods exports such as Apparel and Tea are down by 7% and 6% respectively in the first four months of 2026.

Sri Lanka has built a strong reputation as a responsible sourcing destination, with many industries adhering to high labour, environmental, and governance standards. The country has also made substantial progress in strengthening regulatory frameworks and promoting ethical business practices.

The Ceylon Chamber therefore requests the relevant authorities to engage proactively and at the highest levels with the United States to better understand the basis for the tariff and to present Sri Lanka’s case. Every effort should be made to secure a reduction in the proposed tariff and, ultimately, to seek its removal altogether. It is important that Sri Lanka seeks to return to the lower tariff band while continuing discussions towards achieving a more competitive and predictable trading environment.

Given the importance of the US market to Sri Lankan exports, timely engagement and clear communication on the way forward will be critical in providing confidence to exporters and investors. The Ceylon Chamber stands ready to support these efforts and work collaboratively with all stakeholders to safeguard Sri Lanka’s export competitiveness and long-term economic interests.

Business

Rupee weakens sharply against dollar as energy cost concerns resurface

Published

15 hours ago

2026/06/6

Thilina Walpola

The Sri Lankan rupee came under renewed pressure recently, depreciating significantly against the US dollar across several commercial banks, with the greenback’s selling rate reaching as high as Rs. 340 in some instances, triggering concerns among businesses, industrialists and consumers over the potential impact on inflation, electricity tariffs and the broader economy.

The latest depreciation marks one of the sharpest daily movements in recent months and comes at a time when Sri Lanka is striving to consolidate economic gains achieved through painful fiscal and monetary reforms.

Banking and financial sector sources said increased demand for foreign exchange, coupled with market uncertainty and rising import requirements, had contributed to the weakening of the local currency.

The development is expected to increase the cost of imports across a range of sectors, including fuel, pharmaceuticals, food items, industrial raw materials and machinery.

Economists note that while exporters may benefit from higher rupee returns on foreign currency earnings, the wider economy is likely to face increased cost pressures.

“The exchange rate affects virtually every sector of the economy. Any sustained depreciation inevitably filters through to consumer prices and business operating costs, a senior financial analyst said.

Particular concern is being expressed within the energy sector, where electricity generation costs remain closely linked to movements in the exchange rate.

Sri Lanka continues to rely heavily on imported fuel and energy-related inputs, all of which are purchased in foreign currency. A weaker rupee therefore translates directly into higher generation costs for the power sector.

Energy economists warn that if the depreciation trend continues, the financial burden on the electricity sector could increase substantially, potentially paving the way for future tariff revisions.

The issue has gained added significance amid ongoing discussions on Sri Lanka’s long-term energy transition and commitments to reduce dependence on coal-fired power generation.

Several energy experts argue that the country is entering a delicate phase where policymakers must carefully balance environmental objectives with affordability and energy security.

According to industry observers, the gradual move away from coal-based electricity generation—supported by international climate financing frameworks and policy reforms associated with multilateral lending programmes—could increase the country’s exposure to imported fuel costs unless sufficient low-cost alternatives are developed in time.

They point out that coal has historically provided relatively inexpensive baseload power to the national grid. While renewable energy sources such as solar and wind are essential components of Sri Lanka’s future energy strategy, experts note that large-scale storage systems and backup generation capacity remain costly and technologically demanding.

As a result, any future reduction in coal-based generation without corresponding investments in affordable alternatives could place additional pressure on electricity prices.

The latest weakening of the rupee further compounds these concerns.

“Every depreciation of the rupee increases the local currency cost of imported fuel, spare parts, equipment and energy-sector obligations. Ultimately, those costs have to be absorbed either by the utility provider, the Treasury or consumers, an energy sector specialist observed.

Industrialists have meanwhile warned that rising electricity costs could affect competitiveness, particularly among export-oriented manufacturers that are already operating under challenging global market conditions.

By Ifham Nizam