Business
Constant ‘monetary financing’ had little backing from fiscal side, says Central Bank
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.
The Asian Development Bank (ADB) has approved a $100 million policy-based loan to further support Sri Lanka in strengthening its power sector. This financing builds on earlier initiatives to establish a more stable and financially sustainable power sector.
This second subprogram of ADB’s Power Sector Reforms and Financial Sustainability Program will accelerate the unbundling of the Ceylon Electricity Board (CEB) into independent successor companies for generation, transmission, system operation, and distribution, as mandated by the Electricity Act of 2024 and its 2025 amendment. The phased approach ensures a structured transition, ensuring progress in reform actions and prioritizing financial sustainability.
“Sri Lanka has made important progress in stabilizing its economy and strengthening its fiscal position. A well-functioning power sector is vital for the country’s continued recovery and sustainable growth,” said ADB Country Director for Sri Lanka Takafumi Kadono. “ADB is committed to supporting Sri Lanka’s long-term development and advancing key reforms in the power sector. This initiative will enhance power sector governance, foster private sector participation, and accelerate renewable energy development to drive sustainable recovery, resilience, and inclusive growth.”
To improve financial sustainability, the program will help implement cost-reflective tariffs and a comprehensive debt restructuring plan for the CEB. It will support the new independent successor companies in transparent allocation of existing debts. This will continue to strengthen their financial viability, enhance creditworthiness, and enable these companies to operate on a more sustainable footing.
The program also aims to strengthen renewable energy development and private sector participation by enhancing transparency and supporting power sector entities that are financially sustainable. It will enable competitive procurement for large-scale renewable energy projects and identified priority generation schemes, while upholding strong environmental standards.
Promoting gender equality and social inclusion is integral to the program. Energy sector agencies have implemented annual women’s leadership programs, adopted inclusive policies, and launched feedback mechanisms to ensure equitable participation of female consumers and entrepreneurs. The program includes targeted support for vulnerable groups, such as maintaining lifeline tariffs and implementing measures to soften the impact of tariff adjustments and sector reforms.
ADB will provide an additional $2.5 million technical assistance grant from its Technical Assistance Special Fund to support program implementation, build the capacity of successor companies, and help develop their business plans and power system development plans.
Union Assurance, Sri Lanka’s longest-standing private Life Insurer, has achieved a milestone in its digitalisation journey by being awarded the YouTube Silver Play Button, recognising the Company for surpassing 100,000 subscribers on its official channel. This achievement marks a first in Sri Lanka’s Insurance industry, across both Life and General Insurance, and underscores Union Assurance’s pioneering role in digital engagement.
This accomplishment reflects the Company’s unwavering commitment to making Life Insurance accessible, simplified, and engaging for all Sri Lankans. Through innovative content strategies, Union Assurance has successfully transformed complex Insurance concepts into relatable, informative, and inspiring narratives that empower individuals to protect what matters most; health, wealth, family, and future.
Receiving the Silver Play Button is more than a symbolic accolade; it is a testament to the strength and credibility of Union Assurance’s digital presence. In an era where trust and transparency define brand loyalty, this recognition validates the company’s ability to create content that resonates deeply with a growing audience. It enhances the brand’s authority, reinforces its visibility across digital platforms, and further solidifies Union Assurance as a leader in customer engagement.
Celebrating this achievement, Mahen Gunarathna, the Chief Marketing Officer at Union Assurance stated: “This milestone is a testament to the trust and engagement of our audience and reflects our dedication to innovation, transparency, and customer-centric communication.
LOLC Finance PLC, the largest non-banking financial institution in Sri Lanka, brings to light the significant role of its Factoring Business Unit in providing indispensable financial solutions to businesses across the country. With a robust network of over 200 branches, LOLC Finance Factoring offers distinctive support to enterprises, ranging from small-scale entrepreneurs to corporate giants.
In light of the recent economic challenges, LOLC Finance Factoring emerged as a lifeline for most businesses, ensuring continuous liquidity to navigate through turbulent times. By facilitating seamless transactions through online platforms and expediting payments, the company played a pivotal role in sustaining essential services, including supermarkets and pharmaceuticals.
Deepamalie Abhaywardane, Head of Factoring at LOLC Finance PLC, emphasized the increasing relevance of factoring in today’s economy. “As economic conditions become more stringent, factoring emerges as the most sought-after financial product for businesses across various sectors. It offers a win-win solution by providing upfront cash up to 85% of the credit sale to suppliers while allowing end-users/buyers better settlement period.”
One of the standout features of LOLC Finance Factoring is its hassle-free application process. Unlike traditional bank loans that require collateral, LOLC Factoring extends credit facilities without such obligations. Furthermore, LOLC Finance Factoring relieves business entities of the burden of receivable management and debt collection. Through nominal service fees, businesses can outsource these tasks, allowing them to focus on core operations while ensuring efficient cash flow management.
For businesses seeking Shariah-compliant factoring solutions, LOLC Al-Falaah’s Wakalah Future-Cash Today offers an efficient and participatory financing model that meets both financial needs and ethical principles. Understanding the diverse challenges faced by businesses, LOLC Finance Factoring deliver tailored solutions that enhance cash flow, reduce credit risk, and support sustainable growth. Working together with LOLC Al-Falaah ensures access to a transparent, well-structured receivable management solution strengthened by the credibility and trust of Sri Lanka’s largest NBFI, LOLC Finance.
The clientele of LOLC Finance Factoring spans into various industries, including manufacturing, trading, transportation, healthcare, textiles, plantations, and other services, all contributing significantly to Sri Lanka’s economic growth. By empowering businesses with accessible and convenient working capital solutions, LOLC Finance’s Factoring arm plays a vital role in fostering economic development and prosperity of the country.
In the upcoming quarter, LOLC Finance Factoring remains committed to delivering innovative financial solutions tailored to meet the evolving needs of businesses. As Sri Lanka’s economic landscape continues to develop, LOLC Finance Factoring stands ready to support enterprises on their journey towards growth and success.
IMF pledges additional aid to Lanka following Cyclone Ditwah destruction
Marrikkar Mohamed Thahir takes oath as SJB National List MP
Govt. to roll out loan facilities for new entrepreneurs from next month
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Maldives donates 14 container loads of canned tuna
Lanka signs USD 100M loan and USD 3M grant agreements with ADB
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