Former Central Bank Governor Dr. Indrajit Coomaraswamy (Pictured) critiqued the Debt Sustainability Analysis as using too low a growth rate for the economy. He noted that such a low growth rate compounded by the reopening of credit lines to the government should help the economy grow at a much faster rate.
“If we maintain macro-stability and do the structural reforms while combining what is going on in India we can go beyond 3%.”
Dr. Coomaraswamy was speaking at a virtual investor event on July 9 hosted by CT CLSA, titled “Unlocking Potential: Sri Lanka’s Shift from Stability to Growth,”.
Sri Lanka has made significant strides in its debt restructuring process, with recent agreements with ISB holders and bilateral creditors. Dr. Coomaraswamy commended the Sri Lankan authorities for their adept negotiations, which have brought the country to the final stages of completing its external debt restructuring. He emphasized that the bondholders made concessions beyond their initial demands, showcasing the strong negotiation stance of Sri Lankan officials.
Dr. Coomaraswamy stressed that maintaining macro stability, implementing structural reforms, and leveraging opportunities from neighbouring India is crucial for surpassing the 3% growth rate. He noted that the agreement with bondholders and other creditors is structured to meet the Debt Sustainability Analysis (DSA) targets set by the IMF. However, he emphasized the importance of going beyond these targets to ensure sustainable growth.
A critical component of Sri Lanka’s economic strategy is achieving a primary surplus target of 2.3% next year. Dr. Coomaraswamy highlighted that hitting this target is essential to avoid another debt restructuring. He pointed out that improving tax revenue through better administration and eliminating tax concessions could significantly boost the country’s fiscal health. The goal is to raise the tax revenue to GDP ratio beyond 15%, which would provide the necessary financial stability to support growth initiatives.
World Bank Lead Economist and Program Leader for Sri Lanka, Nepal, and Maldives Gregory Smith noted that the country could not afford to have fiscal contraction as that would be politically unfeasible.
Smith said, “In Sri Lanka, you have 14% of GDP as revenue, and if you take out 7% as interest costs you are left with 7% of GDP spent to run public services. That’s just a recipe for protests and it is not politically feasible.”
Sri Lanka has unutilized credit lines and strong bilateral ties that can be called on to maintain infrastructure investments at optimal levels. The lending has been paused due to the ongoing debt restructuring but none of the major lenders have indicated an aversion to restarting or implementing projects. (TP)
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