LYNEAR Wealth Management’s Chairperson, Dr Indrajit Coomaraswamy, shares insights into the economic recovery, the opportunities and risks, and the road ahead for Sri Lanka as he explains how he came to be a part of LYNEAR and the experience of sitting on the buy side of the table.
Dr Coomaraswamy is the former Governor of the Central Bank of Sri Lanka and also served on its Monetary Policy Consultative Committee from 2013 to 2015, having been employed by the CBSL from 1974-89. From 2015 to 2016, Dr Coomaraswamy was an Advisor to the Ministry of Development Strategies and International Trade. He also held senior positions at the Commonwealth Secretariat in London, starting as Chief Officer for Economics in the International Finance and Markets Section in 1990 and eventually becoming Director of the Economic Affairs Division, a position he held until 2008. He was also Deputy Director in the Secretary General’s office from 1995-2000.
Dr Coomaraswamy recalls how his journey with LYNEAR began in 2020 after he completed his term as the Central Bank Governor. The transition was timely, as Sanjay Kulatunga and Dr. Naveen Gunawardane had approached him to join LYNEAR’s board. “I knew them through previous professional interactions and respected their impressive credentials. Sanjay from Booth School of Business, and Naveen with a PhD in Particle Physics from Imperial College. Their reputation and experience assured me of their credibility and the potential of LYNEAR,” Dr Coomaraswamy says.
The change has also been enlightening, Dr Coomaraswamy reveals. “After spending most of my career in policymaking, I now find myself on the investor side, trying to assess how those policies impact the economy at different levels and the implications they have on companies”.
The journey with LYNEAR has been anything but easy given the challenges the economy confronted from the 2019 Easter bombings, the COVID-19 pandemic followed by the economic crisis and the debt default. Despite these black swan events, Dr Coomaraswamy avers the experience of working with LYNEAR’s small but highly competent and impressive team is a rewarding one. “Their uncompromising commitment to their values and clients and their collective expertise continue to help investors make sense of the market, navigate the uncertainties and preserve their wealth. Being part of that makes this a fulfilling period in my career,” he says in a discussion with Echelon.
What are your views on Sri Lanka’s prospects and investment landscape?
Sri Lanka offers promising investment opportunities in several key sectors, including logistics, tourism, IT, renewable energy, agriculture, and MSME development. The Mannar region’s wind power potential is particularly noteworthy, likened to a gold mine of renewable energy. For sustainable development, Sri Lanka must learn from the experiences of East and Southeast Asian countries, which have maintained prudent fiscal policies, solid macroeconomic fundamentals, and robust external reserves. They have demonstrated how to develop competitive outward-looking economies that promote sustained growth and generate higher-value employment. We can realize stable and sustained growth by adopting proven strategies rather than experimenting with untested homegrown solutions.
The current electoral process has delayed further recovery in asset prices. However, we anticipate increased investment in the stock market and government securities after the elections, provided macroeconomic stability is maintained, debt restructuring is complete and structural reforms continue.
Since declaring our debt standstill on April 12, when our usable external reserves were down to just $20 million, Sri Lanka has made impressive progress in stabilizing the economy. The second review of the IMF Extended Fund Facility (EFF) showed overperformance on nearly all quantitative targets. After six quarters of contraction, growth in the last three quarters has turned positive, surpassing IMF expectations. Inflation has decreased dramatically from a peak of 70% to 1.5%, thanks to decisive monetary policy by the Central Bank.
On the fiscal side, revenue collection has exceeded expectations, and the primary surplus has been larger than projected while the balance of payments shows a current account surplus after many years. However, despite these macroeconomic improvements, the bottom 60% of the population, including the middle class, are still feeling squeezed. Poverty has doubled, with over 25% of the population now below the international poverty line of $3.60 per day, and over 50% are multidimensionally vulnerable, according to a UNDP survey.
Poverty needs to be addressed through a well-targeted and resourced cash transfer scheme (Aswesuma) which is not politicized. In the longer term, sustained growth is crucial to improve living standards. Structural reforms are needed, including factor market reforms, investment climate improvements, SOE reforms, trade liberalization (including trade agreements), trade facilitation as well as modernizing education, training and skills development. These reforms have been on the agenda for several decades but not fully implemented due to their long gestation periods which tend to exceed electoral cycles resulting in a lack of political commitment, and resistance from vested interests.
Can you share your thoughts on Sri Lanka’s approach to debt restructuring?
The completion of domestic debt optimization and agreements with the official creditor committee, Exim Bank of China, and the ad hoc private sector bondholder committee are significant milestones. The IMF’s confirmation that the external debt restructuring agreement with private investors is aligned with its DSA is still pending, as is the OCC’s agreement that there is comparability in the respective debt deals reached with official and private creditors. The progress made so far is commendable, with credit due to the leadership of the Central Bank and Treasury as well as the committed political oversight. The process now needs to be completed.
While we’ve made significant strides in rehabilitating the country’s economic prospects, this is only the beginning. We must continue these efforts to avoid a return to the economic instability we faced in early 2022. The path ahead requires sustained commitment to structural reforms and economic stabilization to ensure long-term growth and prosperity.
Sri Lanka has long struggled with cycles of macroeconomic stress characterized by rising inflation, fluctuating exchange rates, and high interest rates. Historically, the country has faced twin deficits—unsustainable budget and current account deficits. The root cause has been repeatedly unsustainable fiscal policies. This has been compounded by fiscal dominance in monetary policy and financial repression. However, recent efforts have focused on addressing this by implementing clear frameworks for macroeconomic policy. The Public Finance Management Bill introduces rules, including a primary surplus target, which is crucial as it ensures that current expenses are covered by current revenue, preventing further debt accumulation.
In the past, Sri Lanka relied heavily on donor funds and concessional loans. As a middle-income country, we’ve transitioned to borrowing at market rates and have been exposed to rating agencies, which requires greater macroeconomic discipline. The new Central Bank Act prohibits deficit financing by the Central Bank. It also establishes flexible inflation targeting for monetary policy formulation, preventing the artificial suppression of interest rates and excessive credit creation that had previously contributed to inflation rates as high as 70%. While external factors played a role, internal mismanagement was the primary cause. The monetary policy regime currently adopted also requires flexible management of the exchange rate. This should help to avoid a repeat of highly destabilizing episodes of defending a fixed exchange rate by depleting reserves.
The building blocks for economic stability are now in place, and we must guard against signs of policy reversal. Corruption and governance issues remain concerns. The action plan formulated to implement the recommendations of the IMF Governance Diagnostic needs to be implemented. It is essential to hold the government accountable for implementing these actions.
The credibility generated by one of the largest sovereign wealth funds investing in Sri Lanka with LYNEAR as the investment manager served to reassure me, as they would have thoroughly vetted LYNEAR’s corporate governance. From LYNEAR’s perspective, we remain vigilant and possess the expertise and experience to advise investors on how to invest for the long term.