Ex-CB Governor calls for disciplined fiscal policy, hopeful of agreement with external commercial lenders soon

By Shamindra Ferdinando

Former Central Bank Governor Dr. Indrajith Coomaraswamy has warned that the period ahead required the continued commitment to disciplined fiscal policy, a data dependent and forward-looking monetary policy, as well as a flexible exchange rate procedure.

Dr. Coomaraswamy stressed that the above mentioned strategy should be strongly backed by a laser-like focus on constructing an outward-looking competitive economy that drives sustained growth and higher value employment generation, primarily through export transformation.

The former head of the Monetary Board said so when The Island asked him what the government should do (whoever is in power) to bring the debt restructuring to a successful conclusion. Dr. Coomaraswamy appreciated the simultaneous finalization of Memorandum of Understanding (MoU) between the government and Sri Lanka’s Official Creditor Committee (OCC) and another MoU with China’s Exim Bank on Wednesday.

The Presidential election is scheduled for Sept/Oct this year.

Dr. Coomaraswamy, who had served the Central Bank for 15 years, was invited to rejoin as Governor in July 2016 in the wake of the Treasury bond scams that were perpetrated in Feb 2015 and March 2016. Having succeeded Singaporean Arjuna Mahendran, who had been implicated in the Treasury bond scams, Dr. Coomaraswamy was replaced soon after Gotabaya Rajapaksa’s election as the President in Nov 2019.

Dr. Coomaraswamy said that those who represented Sri Lanka had done extremely well to secure the IMF Executive Board approval for the EFF (Extended Fund Facility) second review. “Performance has exceeded targets on a number of key macroeconomic indicators. On debt restructuring, they have completed the DDR (Domestic Debt Restructuring) some months ago and have done very well to sign agreements with the OCC and Exim Bank China,” Dr. Coomaraswamy said.

Having said so, Dr. Coomaraswamy pointed out the pivotal importance of finalizing an agreement on, what he called, a comparable basis with the commercial external creditors, particularly the ISB holders and the China Development Bank (CDB). The former outspoken official underscored the need to bring negotiations between commercial external creditors to a successful conclusion as soon as possible.

Dr. Coomaraswamy said: “The IMF Executive Directors would not have approved the payment of the third tranche unless they were confident that the negotiations were progressing well in good faith. One can, therefore, be hopeful that these negotiations will be completed soon with the terms of restructuring being aligned with Sri Lanka achieving debt sustainability. This would constitute a major landmark in stabilizing the Sri Lankan economy. Completing the debt restructuring is a sine qua non for creating a platform that creates the space for achieving sustained recovery.

The period ahead requires the continued commitment to disciplined fiscal policy, a data dependent and forward-looking monetary policy and a flexible exchange rate policy. This needs to be complemented by a laser-like focus on constructing an outward-looking competitive economy that drives sustained growth and higher value employment generation, primarily through export transformation.”

So, we could be quite hopeful that these negotiations would be completed soon with the terms of the restructuring being aligned with Sri Lanka achieving debt sustainability. Asked to explain, Dr. Coomaraswamy said that he was very confident that the anticipated deal with the private creditors could be reached quickly though at this point it is too early to tell whether debt sustainability can be achieved with just one restructuring.

Dr. Coomaraswamy said: “This is crucial to address the sharp reversals that have taken place in poverty and multidimensional vulnerability.”

The Island

also sought Dr. Coomaraswamy’s opinion on anti-corruption measures. Asked how anti-corruption measures fit into our overall strategy, the former Governor said that at a minimum the government must implement the time-bound programme it has agreed with the IMF to give effect to the 15 recommendations of its Governance Diagnostic. Dr. Coomaraswamy emphasized that this should apply for any government that took office.

Top Opposition spokesman Prof. G. L. Peiris, MP, recently pointed out that the external debt had increased to USD 100 bn from USD 82 bn since July 2022 therefore efforts on the part of the government to portray a much better or improved performance under Ranil Wickremesinghe’s watch is nothing but propaganda. The former External Affairs Minister said that the borrowings from commercial external creditors were included in the USD 100 bn debt.