Spotlight: Econ Op-eds in Summary (Week ended 28th April '21)
1. Sri Lanka’s policy dispute
By: Dr. W.A. Wijewardena
The Central Bank believes that it is firmly on a path to recovery, despite being hit by a second wave of COVID-19. However, the linear growth projections the CBSL has made in the past have been inaccurate, overestimating growth trajectories. Therefore, although the CBSL expects a V-shaped recovery, given many negative factors, this would be a flattened U-shaped recovery at best.
The World Bank predicts growth to be 3.4% in 2021, showing an elongated L-shaped recovery. However, even this growth does not take the economy back to where it was in 2019. The growth in money supply showcase signs of accelerated inflation in the future, with the price controls imposed by the CBSL being ineffective in reducing the high cost of living.
The third wave of COVID-19 will result in a slowdown of exports, contributing to a weak external sector. In line with this, Debt – to – GDP is expected to rise steadily till 2023 and pose an even higher risk to debt servicing. The use of Modern Monetary Theory in financing debt will either result in debasing the currency or further depreciation of the exchange rate. Hence, the CBSL must come up with policies free from any political agendas.
2. Is there an improvement in our external finances and indebtedness?
By Nimal Sanderatne
With falling foreign reserves Sri Lanka is actively seeking assistance from other countries through continuous currency swaps and credit lines to finance vital imports to manage the country’s external finances. While the IMF’s decision to issue additional SDRs is expected to ease the government pressure for a while, the country expects to depend on FDIs to the port city to normalize the financial situation in the longer run.
Despite a possible trade deficit, the country is expected to see an improvement in the Balance of Payment supported by a recovery in tourism and a continued rise in Worker Remittances. These however, hold considerable uncertainty given the current global and local conditions, which would require the country to depend on rollover facilities. However there roll over facilities have increased the country’s debt stock significantly.
Given these conditions the durable solution to the nation’s external financial vulnerability is the achievement of recurrent surpluses in the balance of payments. To achieve these there has to be a resurgence of exports, continued high inflows of remittances and a revival of tourism.
(Compiled by: Promodhya Abeysekara, Malitha Goonerathne & Mariyan Perera)
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