Spotlight: Econ Op-eds in Summary (Week ended 29th July '20)
1. Sri Lanka’s economic consequences of the peace; monetary instability and trade lockdown
· Sri Lanka faces risks of severe monetary instability and balance of payments issues due to high volumes of money printing by the CBSL, and the trend does not show signs of ceasing. While a sovereign rating downgrade was carried out following the latest tax cuts and liquidity injections, rate cuts in 2018 resulted in the economic slump in 2019.
· This was due to targeting the call money rate and the output gap. REER targeting by depreciation was also based on claims that East Asia undervalued its currency. Economic nationalism also ignores monetary instability as the cause of foreign exchange shortages. Sri Lanka must auction debt domestically without CBSL money printing if it is to retain the ability to pay foreign debt.
· Sri Lanka is currently facing a external lockdown with import and exchange controls and the inability to rollover bonds. Further money printing in a low rates environment would lead to BOP issues and inflation. Sri Lanka needs to shift away from policies that would intensify monetary instability, nationalism and regime uncertainty and expropriation that holds the country back.
2. Can Central Bank initiate a V-shaped quick recovery by printing money and lending to businesses
By: W.A. Wijewardena
· With the disrupted global economic conditions affecting the country and a lack of ‘fiscal space’, Sri Lanka could only expect a prolonged economic recovery. This however could be turned into a V-shaped recovery by getting the Central Bank to print new money and make it available to businesses and exporters at low interest rates and avoiding a hard-landing of the economy in the process.
· Central Bank’s offer of a stimulus to the economy had been done in the past by transferring a part of its profits to a fund called the Medium and Long-term Credit Fund or MLCF. However, as the MLCF saw a natural death in the early 2000s, the Central Bank is left with the option of printing money to finance a major part of the liquidity fund of Rs. 150 bn created recently to support the economy.
· Such printing of money is advocated by Modern Monetary Theory (MMT) which argues that governments’ printing money has a favourable impact on economies because people will get encouraged to work harder due to an effect called the ‘wealth effect’. This however, comes with it’s own pitfalls including higher inflation. Thus, a cautious approach is needed when using newly printed money for attaining a quick V-shaped recovery.
(Compiled by: Chayu Damsinghe, Promodhya Abeysekara & Eshan de Mel)
Disclaimer: This information has been compiled from sources believed to be reliable but Frontier Research Private Limited does not warrant its completeness or accuracy. The bullet points provided for each summarised opinion article is written by Frontier Research and has no connection to the respective author. Furthermore, the information contained in these reports/emails are confidential and should not be shared publicly. Disclosure, copying and distribution is strictly prohibited.