The State Minister of Money & Capital Markets and State Enterprise Reforms Ajith Nivard Cabraal recently completed a visit to Oman and Qatar as the special envoy of Prime Minister Mahinda Rajapaksa, heading the country’s delegation to the oil-rich two Middle-Eastern nations.
Since the end of civil war in Sri Lanka, Sri Lanka maintained strong bilateral cooperation with both Oman and Qatar in several spheres. In late 2018, when Sri Lanka faced a credit rating downgrade by international credit rating agencies, the Central Bank (CB) and the then government involved in discussions for currency swap with Qatar and Oman.
The State Minister highlighted that the main objective of the recent visit was to draw Omani and Qatari investments to Sri Lanka’s rupee bonds and to increase cooperation between local banks and businesses and their counterparts in those countries.
Joining for a discussion with Mirror Business, the State Minister revealed key outcomes of the visit, and also commented on some of the recent developments in the country’s economy.
Following are the excerpts from the interview.
What was main purpose behind your recent visit to Oman and Qatar?
We have had close bilateral relationships with Oman and Qatar. In 2014, when I was the Central Bank (CB) Governor, we enjoyed a strong banking relationship with both countries. There were many Sri Lankan banks working closely with counterparts in Oman and Qatar. There were also a number of instances where the CB was also cooperating with its counterparts in the two countries. We would like to re-establish this close relationship once again, that’s why we met up with key officials and held in-person discussions. Therefore, it would be easier for us move forward in the future with established contacts in Oman and Qatar.
Ajith Nivard Cabraal
The CB announced plans to raise funds from Middle-Eastern nations including Oman and Qatar to beef up the country’s foreign exchange reserves. Was this also a reason for your visit to the two countries?
At the moment, many of the central banks in the Middle-East provide big-ticket loans to the United States (U.S.) at low interest rates. Sometimes, they would also like to extend credit to other countries, which may come at higher level of interest. That’s why we thought of having this opportunity explored with them. This would be a win-win situation for both parties. They would receive better returns on their own funds and for Sri Lanka it would mean that we would have more foreign exchange liquidity in our country. It’s something we wanted encourage them to
A good relationship is paramount to move ahead with this initiative. That’s why we engaged with them, updated them on recent developments in Sri Lanka while addressing their queries and concerns. In fact, that’s the reason why we thought of having that contact established.
Are you satisfied with the outcomes of the two visits?
The contacts were very strong. When I met with the Deputy Prime Minister of Oman, Sayyid Fahd bin Mahmoud Al-Said, he expressed their keen desire to work closely with Sri Lanka and so did the Finance Minister of Qatar, Ali Sharif Al Emadi. Overall, we saw a keen interest in them to further develop cooperation with Sri Lanka.
We received the same message from Central Bank Governors of both Qatar and Oman. They were all keen to work closely with Sri Lanka. I believe the several avenues in which Sri Lanka could cooperate with the two countries would be revealed in due course.
What are the particular areas of cooperation currently under consideration?
We invited them for government-to-government relationships, where they could invest in Sri Lanka’s government securities. We also invited them for bank-to-bank relationships with Sri Lankan banks and their banks. Further, we have also asked them to look at business-to-business relationships as well. All our requests were keenly considered.
In the coming weeks and months, I believe the follow-up activities will show the opportunities we created in Sri Lanka as well as in Qatar and Oman. We are looking forward to having that relationship rebuilt again.
You paid a visit to LuLu Group’s regional headquarters in Qatar during the visit. LuLu Group was earlier considering launching their hypermarket chain in Sri Lanka. Were there any developments on that?
In their context, supermarkets are the most visible of their investments. As they are a large conglomerate, I believe that they were keenly looking at Sri Lanka to expand their overseas operations. I think they will explore opportunities available in Sri Lanka now and we intend to play a supportive role in facilitating such investment opportunities for them.
What are the other key areas of cooperation that Sri Lanka would be engaged with Oman and Qatar in the future?
There would be many opportunities arising from tourism, hydrocarbon- related activitiesas well as activities in relation to employment opportunities for Sri Lankan skilled labour in the two countries. There are opportunities for Sri Lanka’s skilled labour particularly in IT, health (care-givers) as well more technical sectors such as architecture and quantity surveying.
In addition, there are also opportunities related to upcoming FIFA game to be held in Qatar. There are many ways and means that Sri Lanka could cooperate and provide services to the two countries.
We also need to look at ourselves, as to how we are going to train and upskill Sri Lankans going abroad in order for them to secure high salaries and other remuneration in those countries. That’s an area that we should be really working on. I have already had discussions with the President and relevant Ministers on this matter. Sri Lanka can now prepare its own personnel to cater to the demand, which in return could bring in a fair chunk of new sources of remittances to Sri Lanka.
Sri Lanka has a record number of maturing Sri Lanka Development Bonds (SLDB) for the remainder of the year. How will the government address this?
Most debt will be rolled-over, however, there maybe be instances where some new investors also could come in and take up a position, which means that others may want to release their liquidity to the market. That would be really helpful where Rupee is concerned.
The Rupee will appreciate in that case. I hope this to happen in near future when new funds start coming into the country. The Rupee would reach a fairly stable position with a tendency to appreciate quite significantly, because it has depreciated far too much in my view.
The expected significant appreciation of the Rupee would become really supportive as far as the budget is concerned and the overall debt position of the country is concerned.
As SLDBs are issued in US$, there are no exchange risks for investors. In the case of Treasury bills and bonds, we are providing a guarantee or SWAP, so the exchange rate risk is removed.
Was there an interest by Omani and Qatari parties to invest in Sri Lanka’s debt instruments?
The treasury bills and bonds were definitely interesting for them. As you aware, when I was the CB Governor, we had as much as US$ 3.4 billion worth foreign holdings in government securities without any guarantee being provided. That was the level of confidence that foreign investors had in us. Unfortunately, that waned as we all are aware.
As we are re-establishing their confidence by interacting with them, they are placing their confidence in us. Hence, that could again be a reality. That’s why I’m keen to undertake as many visits as possible to our source countries, because then they will become more inclined to invest in Sri Lanka.
Some say that interest rates offered for debt instruments such as SLDBs are not attractive enough for investors when compared to yields on Sri Lanka’s ISB issuances. What are your thoughts on this?
In my view, the interest rates were too high on last couple of ISB issuances. We mustn’t benchmark that for our new issuances. The last government issued ISBs at high as 7.8 percent. I’m certainly not ready to benchmark our new issuances in those terms. That’s not a very wise move. We will have to establish new benchmarks for new issuances, which is what we are currently engaged in.
Once, we complete this, we should be able to shrink our debt servicing quite substantially. Already, we have shrunk the debt servicing by as much as a Rs. 280 billion due to interest rate reductions in treasury bills and bonds. That trend is continuing to 2021 as well. There is still more space for that to be tightened further. I am looking forward to create that space as well, because that’s the way to move forward, instead of benchmarking at a high rate and say that we have done well.
Some economists and professionals have expressed deep concerns on the recent surge in the Central Bank holding of government securities, which is also referred to as money printing. How do you respond to their concerns?
My overall concern is with regard to inflation as a whole. The inflation is very well under control right now. If there’s an element of higher holding of government securities, that is not causing an inflationary trend. I believe that’s something we can manage. We are not alone in that, almost all the countries had gone into fairly high holdings of their issued government securities by their own reserve banks over the past year. Our reserve bank, the CB doing that is nothing different.
I think when more and more funds start to flow in particular from foreign sources in relation to what we are doing, it would also lead to a significant reduction in the CB holdings, meaning that the risk would be mitigated quite substantially.
We would see a gradual tendency of these numbers tightening as time goes on.
Does the government plan to return to international capital markets to raise debt either via US$-denominated ISBs or in any other foreign currencies in the immediate future?
As far as ISBs are concerned, I believe that the previous government issued more ISBs than they should have. When the economy was US$ 80 billion, we had about US$ 5 billion in outstanding ISB issuances. The past government didn’t grow the economy beyond that, it remained stagnant there. However, it grew the outstanding ISBs to US$ 15 billion. That’s one of the imperfections that emerged in our economy. We need to pullback from that.
That’s why I am very keen on new ISB issuances until we grow the economy to a substantial level. In this regard, the economic growth is quite important to us. That’s why we attempt to reduce our foreign borrowings substantially and attempt to keep the economy moving with local savings.
We have been quite successful in doing this last year. We succeeded in bringing down the local debt to foreign debt ratio from 50:50 in 2019 to 40:60 in just one year. That’s a substantial shift. In my option it’s quite significant. If we can move the ratio down to around 33:67, I believe our economy would do very well, that’s what we are aiming for.
Once we grow the economy to the desired levels as GDP numbers are becoming stronger, we will reach a position to manage the debt comfortably without a problem at all. Even now, we feel comfortable on how we manage the debt. It will become much easier once we reduce the foreign exposure of our outstanding debt stock to a one third.
Sri Lanka’s US$-denominated ISB yields saw several spikes in the secondary markets on default worries raised by various global institutions. However, the yields, particularly of the US$1 billion ISB which is maturing on July 27th this year was trending downwards after Sri Lanka entered into a US$ 1.4 billion swap arrangement with China.
What were the implications of this on Sri Lanka?
All were speculations, and in my opinion that was absolutely warranted. At the end, Sri Lanka didn’t lose, those who lost were the investors.
Driven by these speculations, some investors sold off their bonds at US$ 60 three months ago when they could have received the US$ 100 at maturity in another two months. It was the poor overseas investors who had to bear losses, I actually feel very sad for them. They were frightened and became anxious over nothing. They must be quite upset with the Rating Agencies and their investment banks who advised them to sell.
As Sri Lankans we know that we are not going to default on our debts, they bought the ISBs from foreigners at deeply discounted prices. I think Sri Lankan holding of the upcoming maturing ISB is around US$ 300 million at least now. Out of Sri Lanka’s overall outstanding ISBs stock of US$ 14 billion, approximately US$2 billion is estimated to be held by Sri Lankans.
Although, in a way, I’m happy for Sri Lankan investors who were able to make gains out of it, it’s saddening that foreign investors who invested in our bonds with their trust in us ended up with losses.
Has Sri Lanka received better deals in recently concluded US$1.4 billion swap arrangement with China’s Central Bank and the US$ 500 million loan extended by China Development Bank (CDB)?
The interest rates are much better than what we have been paying for ISBs. We are also shrinking our debt servicing cost quite substantially in that way as well.
The beauty of the SWAP arrangement is that we only have to draw the funds out when it’s required by us. It’s somewhat similar to an overdraft. We are not accessing it until such a time arrives requiring funds, so we are holding it until then. That’s entirely a call and we can access it whenever we wish to within the agreed period.
Also, if we access the entire fund and take it in, given our investment opportunities in US$ are quite low at the moment, we would pay a higher rate and invest at lower rates. Sometimes, that’s not the most prudent thing to follow.
We are hoping to build up a heathy SWAP arrangement with several lenders who can be drawn at any time, but not accessed until we require it. That way, our overall management of foreign debt would be on a much better level than what we had in the past five years.
Can you name some of the other central banks that are currently being considered or in negotiations with to enter into similar swap arrangements?
We are looking at South-South cooperation a lot more than we had in the past. If you recall, when we met with Pakistani Prime Minister Imran Khan, one of the areas that we discussed was how we can cooperate within our region a lot more than what we did in the past. There are so many ways of doing that.
There are reports of trade-related terms attached to loans extended by China. Are such terms favourable for Sri Lanka?
We would like to have more and more trade with China anyway. With China’s rise to become a global economic power, many countries are looking to work closely with China.
China is a very strong investment nation now. I believe having investment and trade relations with China, is in the interest of any country. We are happy to engage with China because we have a very good opportunity of progressing quite rapidly.
Don’t you think that Renminbi-denominated Panda bond issue could be a good opportunity for Sri Lanka to raise funds at this juncture?
It could be. However, we are not pursuing it at the moment. It is certainly something that we could be looking at. We are looking at areas where we can issue debt without too much of an issuance premium and so on.
What is the current status of the New SEC Act and Demutualisation Act?
The draft of the SEC bill has already been approved by the Cabinet of Ministers. It should be presented to Parliament shortly. In due course, we will present the other bills as well.
Currently, we have presented the Colombo Port City Economic Commission Bill to Parliament. There’s a certain sequence in which we are presenting these bills preparing Sri Lanka for a new movement.
Have the stockbrokers and the government reached consensus on the structure of the envisaged Demutualized Colombo Stock Exchange?
I have not seen any issue on that. However, the brokers must acknowledge that this is a national process and the fact that the government has also played a key role in restoration of confidence and ensuring that markets have visibility and liquidity. All this have been facilitated by the government as well.
The same brokers were there during the last five years as well, but where was the market? something has changed for this shift to take place.
All know that they need to be a part of an overall picture. If the overall pie is getting bigger, they all stand to gain. They will benefit a lot more by taking a smaller share in a much larger pie. There’s no use of fighting over a smaller pie and trying to take a stake.
Under State-owned enterprise (SOE) reforms, there were proposals to list some of SOEs in the Colombo Stock Exchange (CSE). Are there any plans to list any SOEs on the CSE?
We are in the process of scrutinizing SOEs one-by-one. We are making sure that they become lot more viable and lot more sensitive to markets to perform much better. As you are aware, there are legacy issues in some of these entities. However, I’m taking a personal look at all these to ensure that we build them better.
We don’t have any intentions of SOE equity listings, but certainly debt listings are on the cards. Having said that, if there are certain non-strategic assets that are being held, we may treat them better. For an example the government holding of a hotel, may not be very useful.
We have already seen some new trends where some SOEs issuing market-related debt, which has ensured they are much more responsive to investors as well. In the coming weeks and months, we will ensure these institutions are better managed and they are able to deliver better results, while meeting real objectives of these entities.