Central Bank downplays possible Brexit impacts on Sri Lanka

The newly appointed Central Bank Governor, Dr. Indrajit Coomaraswamy downplayed the impact of Britain’s decision to leave the European Union’s common market (Brexit) for Sri Lanka but did not rule out “higher terms” when seeking international capital market funding. Dr. Coomaraswamy, who spent nearly two decades in London before returning to his motherland soon after the war ended, said the impact of Brexit on domestic economy would “not be significant”.

“Where it could have an impact, not only for Sri Lanka but for any country that wants to go to the market; if at one point we decide to go to the market, then the terms are likely to be higher than they would have been if Brexit wasn’t there,” he said.

Asked if the Brexit would trouble the Central Bank’s earlier plans of tapping the external capital markets, he said, “That option is there”. Sri Lanka’s reliance on exports to the United Kingdom (UK) is as high as little under 10 percent in earnings and the country is the third largest market for tourist arrivals with over 160,000 Britons visiting in a single year. Due to the UK currency - sterling - falling to over three-decade low post-Brexit against the dollar, both export earnings and tourist arrivals from the world’s fifth largest economy could decline in the short term until the currency recovers.

The imports from the UK however will be cheaper. In fact, the UK economy’s biggest vulnerability is also its very high current account deficit. Meanwhile, speaking about the impending external vulnerabilities of Sri Lanka, Dr. Coomaraswamy said the country faced no crisis but stressed that the external sector was “not in a good equilibrium” with record trade surpluses, continued current account def ici ts and lacklustre foreign direct inflows. He also sees no major difficulties in meeting the external debt obligations. During the last four decades, Sri Lanka achieved its growth through higher budget deficits, which led to overheating of the economy. However, the Southeast Asian economies achieved their high growth levels over a sustained period through continuous current account surpluses in their external accounts. Hence, he reminded the need to migrate from a higher budget deficitdriven growth to higher current account surplus-driven growth for Sri Lanka. But increasing goods and services exports will be a key reform in that journey.

For this to happen, Sri Lanka needs to open its factor markets, which remains a highly contentious issue. Dr. Coomaraswamy is a pro-market economist with very liberal ideas and a supporter of the controversial Economic and Technology Cooperative Agreement (ETCA) with India. He often advocates attracting foreign direct investments (FDIs) from both India and China to set up plants here and manufacture to export back to India and China.