Spotlight: Econ Op-eds in Summary (Week ended 17th February '21)
1. Policy trilemma poses formidable challenges to interest and exchange rate management
By: Professor Sirimevan Colombage
Central banks all over the world suffer from “policy trilemma”, where it can achieve only two out of its three properties - monetary policy autonomy, exchange rate stability and free foreign capital mobility - at any given time when trying to achieve its policy objectives. As of recent, Sri Lanka has faced significant pressure in terms of currency depreciation. With the lowering of interest rates, the currency was made to be less valuable and hence depreciation ensued.
In response to the currency depreciation, the CBSL implemented restrictions on foreign exchange transactions over the last year to help stabilize the currency and settle mounting external debt commitments. This situation is further worsened with drastic revenue cuts and expenditure hikes over the last year. High levels of domestic borrowing provide signs for the upward movements in interest rates in the near future.
This excessive level of money printing to repay public debt is posited to be harmless according to Modern Monetary Theory, a strategy the CBSL has been following as of late. However, if the CBSL is unsuccessful with this strategy, it would need to negotiate an IMF agreement to manage future debt repayments. This could lead to the maintenance of fiscal discipline in the future.
(Compiled by: Malitha Goonaratne)
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