By Paneetha Ameresekere Courtesy Ceylon Today

The future fiscal policy of the Government of Sri Lanka (GoSL) would be to borrow to settle debt and not to enhance government finance, Central Bank of Sri Lanka (CBSL) Governor Dr. Indrajit Coomaraswamy said.
Sri Lanka’s debt profile is equivalent to 76% of GDP. Speaking at the CIMA Business Summit on Tuesday he said that there are however no sovereign debt maturities to settle next year.

But from 2018 onwards there will be sovereign debt maturities to settle, each of US$ one billion in value, the Governor said.
He said that monetary policy is subsumed by fiscal policy and not vice versa. Fiscal policy is the writ of the GoSL and not CBSL’s, which writ is to maintain exchange rate (ER) stability and a low interest rate regime, said Coomaraswamy.
But what has happened is that there have been fiscal slippages in the past leading to high budgetary deficits and interest rates, as well as inflation and an overvalued ER, circumstances over which the CBSL had no control, he said.
On the other hand, the nation’s successful East Asian peers have maintained low budget deficits, devalued their ER, whilst working towards a low interest rate and inflationary rate regime, the Governor said. As a result, China was able to lift 400 million of its people out of poverty.
Coomaraswamy said that there should be targeted subsidies with a simultaneous targeting of a reduction in the nation’s fiscal deficit from the current 7.4% of GDP to 3.5% of GDP.
Otherwise, the island cannot aspire to grow at the 7-8% level which it aspires to.
And with an ageing population, growth cannot be stimulated by labour. It will have to be driven by innovation and productivity gains.
He further said that by this time next year Sri Lanka will have preferential trade agreements, giving it access to an aggregate market of three billion. Those include agreements with China, India and Singapore.
The Governor said that when Development Strategies and International Trade Minister Malik Samarawickrama was in China in March, the Chinese authorities had urged him to sign the proposed Economic and Technology Cooperation Agreement (ETCA) with India so that that would be an inducement for Chinese companies to invest in Sri Lanka so as to export to India and vice versa.
The Governor further said that Singapore has undertaken a Master Plan study of Trincomalee with a view to investing in this area while Japan was looking at investing in Kandy and India was involved in developing Kankesanthurai Harbour and the Palaly Airport.
There are also proposals to build the Colombo-Kandy and Colombo-Ratnapura Highways. Coomaraswamy further said that this was the best opportunity that has our way over the past 50 years in Sri Lanka. He said that because the conflict was over and many negatives being things of the past , Sri Lanka’s proximity to the growing economic giant India and straddling the centre of China’s silk route, good relations with capital rich Japan and Korea and also with its major export markets in the West, now was the opportune moment for Sri Lanka.
He further said that the island was having good relations with the rest of the world, a hint that poor relations with India during the J.R. Jayewardene era had spawned the island’s 26 year- old Tamil terrorist conflict, which bled its economy nearly white.