Spotlight: Econ Op-eds in Summary (Week ended 23rd June '21)
1. Fiscal policy corrections postponed until 2030, defying IMF support
By: Professor Sirimevan Colombage
The government recently took actions to defer the fiscal rules introduced in the Fiscal Management Responsibility Act (FMR) to 2030 and while also introducing relaxations to the current fiscal rules. In conjunction to which, the debt to GDP target outlined was shifted to 2030. Given these changes, the budget deficit is expected to be approximately 12% by end 2021- a clear sign of refusal of IMF support.
Such deferments is not surprising given that that the non-adherence to fiscal targets outlined in the FMR in the past had let to a growing of the debt burden to unsustainable levels. The amendments made to the Monetary Law Act in the past on inflation targeting being abandoned, in combination to the credit expansion undertaken by the CBSL recently, has led to a rapid rise in the money supply.
The effect of rupee depreciation coupled with rising inflation had led to poorer consumers suffering a greater impact on their purchasing power. The delaying of policy adjustments in effect will pass it on to the future generation, and the government must ensure that it has strict budget targets and sound structural reforms to ensure price and economic stability in the country.
2. Growing concerns in external finances
By Nimal Sanderatne
Sri Lanka’s external finances had become a serious matter of concern with a USD 4bn debt repayment falling due this year, especially as exports fall due low production and a significant decrease in raw material stocks. Adding on to the pressure are the rising import prices.
However, there has been a significant increase in workers’ remittances in the first few months of the year. Information Technology (ICT) services earnings have been increased compared to last year. These inflows along with a possible IMF SDR allocation of around USD 800mn this year could positively affect the balance of payments.
Given these conditions Sri Lanka is most likely to meet its foreign debt repayment obligations this year with multilateral and bilateral support contributing towards this. In the long run however, country needs to make its policies right to increase imports, reduce the trade deficit and increase capital inflows. Neither import restrictions nor excessive creation of money is a sustainable solution.
(Compiled by: Promodhya Abeysekara, Malitha Goonerathne & Mariyan Perera)
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