The World Bank has offered Sri Lanka a policy-based guarantee to issue foreign debt with an allocation of USD 250 million with the potential to leverage upwards to a figure of USD 1 billion.Central Bank Governor Dr Indrajit Coomaraswamy said, “A billion dollars can be borrowed from international markets at the AAA world bank rating. Cleary there will be considerable savings.”
Dr. Coomaraswamy added, “there has been a lot of debate on whether or not this flexible inflation targeting (FIT) framework is working or not. Inflation has been contained within the 4-6 percent range despite the 16.4 percent depreciation of the currency.”
He was speaking at the A.S. Jayawardena memorial lecture at the Centre for Banking Studies last week. The exchange rate under FIT must be flexible to act as a shock absorber. Despite what has been said in some quarters we are not defending any (exchange) rate, real effective rate or any other rate. There is not a rate that the central bank is defending.”
Dr. Coomaraswamy said the Central Bank Intervened in FX markets to prevent disorderly adjustment due to the shallow USD 100 million daily trade between the rupees and the dollar. He said that though there are different methods of managing the exchange rate a fixed/monetary board style system was not suitable to a country like Sri Lanka with a high persistent current account deficit. He cited high export surplus nations as suited to a monetary board system.
He said, “the pressure is too much to be able to run successfully domestically.” He added, “macroeconomic stress has been the most important causal factor for Sri Lanka regressing from being second in Asia on most socio-economic indicators at the time of independence to a position when several other Asian countries overtake us.
Of course, there is complex causality, but macroeconomic stress has been the most damaging to the prospects of the country.”
From the 1950s onwards Sri Lanka relied too heavily on the taxed surpluses from the crop sector to build the free education and healthcare services.
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