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Cabral said that even if he had to resolve Sri Lanka’s depleted foreign exchange reserves, he was not keen on international bailouts.
Sri Lanka is seeking help from a senior central bank governor as it seeks to increase its depleted foreign exchange reserves and repay debt without seeking international bailouts.
Ajith Nivard Cabraal, the former Junior Minister of Capital Markets, who led the Central Bank of Sri Lanka from 2006 to early 2015, will again serve as President. Cabral, who resigned from Parliament earlier on Monday, confirmed his appointment in a telephone interview. “I will focus on stability first, then growth,” Cabral said.
Sri Lanka’s 2024 U.S. dollar bond yield rose 43 basis points in the first two trading days and fell by about 4 basis points to 25.3% on Tuesday. During his previous term as governor, Cabral kept the inflation rate in the low single digits and lowered interest rates. With the end of the island’s civil war, tourism and economic growth recovered, and foreign exchange reserves increased.
He is now facing a country that has almost been deprived of tourism income due to the coronavirus, and lockdown measures taken to contain the virus, which have harmed domestic activities. This has depleted the foreign exchange reserves of South Asian islands. This situation has led to the Standard & Poor’s Global Rating downgrading the country’s prospects to negative, and it is now possible to fall into a crisis.
Currently, the central bank has restricted the amount of foreign currency that can leave the country and has tightened import regulations to prevent the purchase of commodities such as chocolate, wine, cosmetics and electronics.
According to investors in the country’s dollar bonds, Sri Lanka’s depleted reserves may force monetary policy to tighten more aggressively, and may even require assistance from the International Monetary Fund. Cabral believes that the IMF’s help is unattractive. He told the BBC last week that “Sri Lanka does not have to ask for the IMF to cause unnecessary suffering to its lenders and investors.”
Policy response
Cabraal succeeded Weligamage Don Lakshman, who stepped down on Tuesday. When announcing his early retirement on Friday, Lakshman said that because the pandemic has caused an extraordinary period of interruption, the monetary authority must use “resources” to intervene, and the “excessive money supply” caused in the process is easily reversed.
The central bank unexpectedly raised the policy interest rate in August, citing the effect of low credit costs on the continuous increase in imports, which led to the widening of the trade deficit. The bank said at the time that the interest rate action was also to prevent any accumulation of excessive inflationary pressures.
The Central Bank of Sri Lanka said on Friday that after the country converted the Special Drawing Rights of the International Monetary Fund into U.S. dollars, Sri Lanka’s foreign exchange reserves increased by 26% to 3.55 billion U.S. dollars last month.
After repaying a portion of the US$1 billion in debt, the country’s foreign exchange reserves fell to US$2.8 billion in July. This drags the import guarantee to 1.8 months, while the minimum period required is 3 months.
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