Spotlight: Econ Op-eds in Summary (Week ended 11th August '21)
1. Why are we fighting shy about going to the IMF?
By: Dinesh Weerakkody
The IMF recently bailed out debt-ridden Congo, showcasing their ability to help other nations service their debt. However other countries who offer debt relief, can be doing so to further their own economic or political goals. Sri Lanka would not have requested funding from other countries if the pandemic hadn’t impacted tourism as heavily as it did.
A major measure taken this year to align with the IMF’s stated goal of maintaining financial stability, is the current SDR allocation of $650 bn, the largest ever allocation by the Fund. $275 bn of this is set to be allocated to emerging and developing economies, with Sri Lanka expecting to receive approximately $800 mn in SDR’s.
Currently IMF programs are likely to have more favourable conditions than in the past, given that the Fund is under strain to help developing nations rebuild their economies. Sri Lanka must take advantage of the concessional support the IMF offers and must avoid shunning them for ideological reasons given its BOP challenges and high debt service requirements.
2. Replenishing low foreign reserves and strengthening external finances
By Nimal Sanderatne
Sri Lanka is having high hopes that the country’s external financial vulnerability can be resolved after the recent loan payment. Government hopes to build up the foreign reserves using inflows of currency swaps, the IMF SDR grant and earnings from services in upcoming months. However as import expenditure increases, levels of reserves will deteriorate during the rest of this year as well as next year.
Although the government is expecting short-term inflows, these are temporary measures and doesn’t address the problem that lies with the disequilibrium in external finances. Even though EDB has been able to increase exports, imports have been increased at a higher rate. It is likely to experience widening trade deficit due adverse policies such as restrictions on fertilizer during the second half of the year.
Even with many restrictions and obstacles, it is significant how manufactured exports have made a solid and gradual revival. Given the present situation of external finances of the country, the only viable solution is the reduction of the trade deficit through increased exports and achieving a balance surplus through earnings from services such as ICT and worker’s remittances.
(Compiled by: Chayu Damsinghe, Malitha Goonerathne & Mariyan Perera)
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