The head of the Central Bank of Sri Lanka on overcoming the economic crisis in the country

As Sri Lanka grapples with one of the worst economic crises in more than 70 years, its central bank governor expressed optimism that the country will be able to cope, but stressed the importance of measures that “may not be very pleasant.”

We can say with confidence that Sri Lanka will survive these times in a short period… We should be able to get out of this situation sooner rather than later,” Ajit Niward Kabraal said on CNBC’s Squawk Box Asia on Monday.

The country declared an economic emergency in September to control food supplies and contain soaring inflation following a sharp devaluation of the national currency. Sri Lanka is facing widespread and severe shortages of food and other essentials. He also ran out of cash to import fuel, leading to long queues at gas stations.

Cabraal has acknowledged these and other challenges Sri Lanka is facing, such as rising geopolitical tensions and a tourism sector hit hard by the Covid pandemic. He said the central bank wants to “take certain key steps to deal with this situation, some of which may not be very acceptable to the general population. However, for the greater good of the economy, they will need to be done.”

Call for higher prices

To address the country’s severe fuel shortage, Cabraal said the central bank had made a “very clear call” to the Sri Lankan government to “drastically increase” fuel and electricity prices so that there would be a “natural contraction” in demand. .

People line up for diesel fuel at a gas station in Colombo, Sri Lanka, on March 3, 2022.

Ishara S. Kodikara | AFP | Getty Images

He also urged the government to raise tariffs on non-essential items that “we can do without at this challenging time” to reduce overall demand for imports.

“We expect the government to take these steps, and if they are taken, a gradual reduction in demand for fuel, as well as secondary subjects will help us deal with this period in a reasonably satisfactory manner,” he said.

Cabraal shrugged off concerns when asked about how realistic it would be to pass the cost on to end consumers at a time when malls in Colombo were forced to turn off electricity to save energy, cars were stuck on the roads due to lack of fuel and across the country. there are 7.5 hour daily power outages.

He said fuel prices were already “very, very low” and that the crisis would force the government to finally speed up its renewable energy plans.

debt crisis

Sri Lanka also faced a severe debt crisis. Since 2007, successive governments have issued sovereign bonds to Sri Lanka, with China being the main creditor.

While the country has about $7 billion in external debt obligations in 2022, including a $1 billion bond redemption in July, Cabraal said he is confident the country will be able to make all payments without any defaults.

On Monday, he repeated a statement he made in January that the South Asian nation does not need economic assistance from the International Monetary Fund to help its ailing economy.

Instead, Cabraal said the reform package proposed by the central bank to the Sri Lankan government last Friday would bring “discipline to the entire economy.” He added that the central bank had asked for the postponement of some non-essential projects, measures to contain inflationary pressures and, among other things, to strengthen energy conservation measures.

“If it could be done, we wouldn’t necessarily need an external program. This is its own program, which also reflects the views of many international observers. And it is important for the government to recognize this,” Cabraal said.

“If they do, I believe we will be on the road to recovery. And this situation that we are facing now will be a thing of the past sooner than we think,” he said.