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

Super El Niño threatens to deepen Sri Lanka’s drought and economic woes

Published

5 hours ago

2026/09/4

Thilina Walpola

By Ifham Nizam

A potentially dangerous El Niño is gathering strength across the Pacific, with the World Meteorological Organization (WMO) warning that the climate event is expected to become very strong and continue into February 2027, raising the risks of drought, floods, extreme heat and major disruptions to rainfall patterns worldwide.

The warning has particular significance for Sri Lanka, where communities in several agricultural districts are already facing severe drought, depleted water sources and shrinking farm incomes.

The WMO said yesterday that forecasts from its Global Producing Centres show an “exceptionally high likelihood of nearly 100%” that El Niño will persist through February next year. The organisation said this is the first time one of its El Niño/La Niña updates has been so unequivocal, reflecting strong agreement among forecasting systems.

The event, driven by exceptionally warm waters in the tropical Pacific, is expected to strengthen further in the coming months, reach very strong intensity and peak towards the end of this year. Its climate impacts, however, are expected to continue well into 2027.

According to Meteorological Organization

Sri Lanka is already experiencing the consequences.

A Reuters report published on Wednesday from drought-affected areas said rainfall deficits of between 85% and 100% have been recorded in important farming regions including Ampara and Monaragala.

Wells, tanks, rivers and lakes have dried up, while tens of thousands of people are depending on government water deliveries, with some remote communities reportedly waiting up to 23 days for supplies.

The drought is also rapidly becoming an economic problem for rural communities. Croplands have withered, livestock operations have been affected and farmers who have lost their harvests are being forced to seek daily-paid employment to survive.

The latest WMO outlook also warns that the consequences of El Niño will not necessarily be uniform. The severity and timing of impacts in individual countries depend on geography, season and other climate drivers, including conditions in the Indian and Atlantic oceans.

For Sri Lanka, the Indian Ocean Dipole (IOD) will therefore be crucial. The WMO expects a positive IOD to develop, with a September-November seasonal mean of about 0.9°C. This could modify the normal influence of El Niño on rainfall over the region.

That creates another potential risk for Sri Lanka: the country may have to prepare not only for continued drought but also for episodes of intense rainfall, flooding and landslides later in the year. Climate variability increasingly means that a prolonged water shortage can be followed by sudden and destructive rainfall rather than a gradual return to normal conditions.

For Sri Lanka, the warning should therefore be viewed as an economic and national-planning issue, not simply a meteorological forecast. Agriculture, drinking water, electricity generation, food imports, public expenditure and rural livelihoods could all be affected.

Business

ABC Trade & Investment – All-China Environment Federation partner to drive Sri Lanka’s green infrastructure and investment

Published

5 hours ago

2026/09/4

Thilina Walpola

ABC Trade & Investments (Pvt) Ltd, a leading homegrown conglomerate in Sri Lanka’s ICT distribution and diversified business landscape, has formally entered into a strategic Memorandum of Understanding (MoU) with the All-China Environment Federation (ACEF). The partnership establishes a collaborative framework aimed at accelerating new-energy development, water management, and environmental protection projects across Sri Lanka.

The agreement bridges advanced Chinese engineering capabilities, equipment, technical expertise, and investment resources with ABC Trade & Investments’ local operational strength, market insight, and project implementation skills. By pairing international technology with on-the-ground execution, the initiative is designed to address Sri Lanka’s long-term environmental and civil infrastructure priorities.

The MoU was signed by Amalrajah Jayaseelan, Director/CEO of ABC Trade & Investment (Pvt) Ltd, and Shi Xiang, Secretary-General of the Belt & Road Eco-Industry Cooperation Working Committee of ACEF. The signing took place during the China–Sri Lanka Environmental & Energy Exchange and Cooperation Meeting at the Nondescripts Cricket Club Grounds in Colombo, held under the theme “Empower Green Development, Jointly Build a New Pattern of China–Sri Lanka Environmental & Energy Industry.”

Business

Heavy buying interest slows down stock trading

Published

5 hours ago

2026/09/4

Thilina Walpola

By Hiran H. Senewiratne

The CSE yesterday was very active at the outset but later slowed down due to heavy buying interest noted for select stocks.Amid those developments both indices moved upwards. The S and P SL20 went up by 23.73 points. Turnover stood at Rs 2.44 billion with 10 crossings.

The crossings were: Renuka Foods 19 million shares crossed for Rs 502 million; its shares traded at Rs 25.30, Dipped Products 1.9 million shares crossed to the tune of Rs 117 million; its shares traded at Rs 60.50, JKH 3.9 million shares crossed for Rs 78 million; its shares sold at Rs 19.70, Dialog Axiata 1 million shares crossed to the tune of Rs 46.6 million; its shares traded at Rs 46.40, Tokyo Cement 500,000 shares crossed for Rs 39.5 million; its shares sold at Rs 79 and Watawela Plantations 800,000 shares crossed for Rs 34 million; its shares were Rs 42.50 each.

In the retail market companies that mainly contributed to the turnover were; Vallibel Finance Rs 281 million (3.3 million shares traded), Dipped Products Rs 114 million (1.9 million shares traded), Haycarb Rs 90 million (424,000 shares traded), Alumax Rs 42 million (2.6 million shares traded), HNB Rs 38.5 million (102,000 shares traded), Swisstec Rs 30 million (506,000 shares traded) and Sierra Cables Rs 34 million (880,000 shares traded). During the day 118 million share volumes changed hands in 17802 transactions.

It is said that mixed market reactions were noted during the day. Financial sector, especially Vallibel Finance, performed well, while the manufacturing sector, especially JKH and Hayleys , performed significantly.

Meanwhile, Co-operative Insurance Company announced the redemption of 1,100,000 cumulative redeemable preference shares issued in December 2020 to the Health Department Co-Operative Thrift & Credit Society.

The total redemption consideration of Rs 16.61 million, including a 9 percent per annum cumulative dividend, is set for settlement on August 31, 2026.

Yesterday the rupee was quoted at Rs 328.25/35 to the US dollar in the spot market, stronger from Rs 328.30/60 the previous day, while bond yields were somewhat steady, dealers said.