No rate volatility next year as govt. better prepared to tackle debt: CB

• Banks on proposed Liability Management Act, buffers and income from asset sales
• Says debt raising at short notice, which creates volatile rates, is no longer practiced 

By Chandeepa Wettasinghe

Market interest rates are unlikely to experience volatility through public debt-servicing requirements, as the Central Bank the government are better prepared to manage domestic and foreign debt next year with the planned implementation of the Liability Management Act and the buffers being built up by the state from borrowings and income from asset sales.

“The liability management exercise, the fundamental reason is to smoothen out the volatility in interest rates, in terms of rather than going to the market at the times of maturities and trying to raise that money, large amounts in a day or two,” Central Bank Deputy Governor Dr. Nandalal Weerasinghe said.

He was responding to a question on whether interest rates will increase next year due to government debt service requirements, during a press conference, last week.

He said that in the past, the government had approved debt raising at short notice, which had forced the Central Bank to raise the funds at the then prevailing market rates, thereby putting upward pressure on market interest rates.

This past practice, which created volatile market rates, had made the Central Bank’s monetary policy stance weaker, according to Dr. Weerasinghe.

There was some speculation in the market that interest rates may record an upward tick next year. Central Bank Governor Dr. Indrajit Coomaraswamy said that there would be a peak in domestic debt maturities in 2018.

“We want to go to the market very early next year, so that we are able, if the maturity comes into the system that also will take the pressure off both the interest rates as well as expenses,” he said.

lready the government is acting with foresight; despite not having significant debt maturities in recent months, the government has been raising significant funds to build a buffer stock for payments over the next year.

“So whenever there’s excess liquidity we go to the market and raise and keep the money as a buffer, so that when it comes to the maturity, we are not compelled to raise that money at any market interest rates that prevail at that time. So that’s more to smoothen out that cycle than have volatility,” he said.
The Liability Management Act will allow for the government to raise a certain amount of debt above the limits specified in regular budget appropriations, in order to raise funds for debt repayment and emergency funding.

Sri Lanka also has significant contingent liabilities under the balance sheets of state-owned enterprises amounting to Rs.1.2 trillion, which form a potential debt shock source for the economy, according to the International Monetary Fund.

The Liability Management Act will also act as a contingency plan for this debt shock.

Further, the government had announced its intentions to start rolling over massive foreign debt repayments amounting to US $ 15 billion between 2019 and 2022 earlier in 2018, in order to benefit from lower global interest rates.

Dr. Coomaraswamy further went on to say that the funds earned from state asset sales, such as the Hambantota port and the proposed sale of several non-strategic enterprises, will be saved up for debt repayment.

“Hambantota money for instance will go to a foreign currency account for foreign liability management. Any rupee mobilized through divestitures will go to another account to be utilized for domestic liability management,” he said.