The Easter Sunday bombings “clearly” had an impact on confidence and sentiment, but the extent of disruption likely depends on how quickly the Government can stabilise the situation, says Central Bank of Sri Lanka Governor Indrajit Coomaraswamy.
In an exclusive interview with CNBC, Coomaraswamy said the Central Bank forecast the economic growth to be between 3.5 -4% this year before the unfortunate Easter Sunday attacks.
“We thought that there were sufficient grounds for pick up the growth from the 3.2% last year. The tourism sector was doing very well. Industrial sector, particularly industrial exports were buoyant. The 16% depreciation (of rupee) last year clearly helps. There were number of pockets, like IT industry where we were seeing buoyancy in the economy,” he said.
The Governor said it’s far too early to say to what extent these events would have an impact on the economic growth. “Clearly it would have an impact on confidence and sentiment. But I think the extent of disruption would depend on how quickly the Government can stabilise the situation.”
“If one is able to bring normalcy and also to give confidence to the people and the businesses that the situation is under control, then it is possible that the impact can be contained,” he said.
According to the Governor of the Central Bank, the tourism sector will be the most affected in the short term. He pointed out that the tourism sector has a number of supply chains attached to it, such as the agriculture sector, services, handicrafts, transport, leisure activities and transport and all these will likely to be affected.
Tourism sector, which is roughly about 5% GDP has a seasonality. In terms of tourist arrivals the peak time is November through March and in the months of May and June arrivals are low.
“The fact that we are going to the off season, we have to mitigate the effects to some extent. It again depends on how quickly we can stabilise the situation and give confidence both to Sri Lankans and to visitors. If by November we have stability in the country, then the disruption may not be significant,” Coomaraswamy explained.
When asked whether the Central Bank will choose to intervene if the rupee becomes under pressure, the Governor said the Central Bank will not be defending a particular rate and will manage the rate to be flexible.
“In an inflation targeting framework, the exchange rate is the first line of defense. It has to be flexible to take on shocks, to adjust to shocks. So we will manage the exchange rate flexible. We will not be defending any particular rate.”
However, he said the Central Bank will intervene to prevent disorderly adjustment.
“In the last couple of days we have intervened a little bit in the market to ensure that this unexpected shock does not disrupt the forex market and that the exchange rate does not move in a way that it is misaligned with the underlying fundamentals.”