Spotlight: Econ Op-eds in Summary (Week ended 22nd January 2020)
1. Political Triumph and Economic Morass
By: Ahilan Kadirgamar
· The current economic dynamics of the country are crippling, with a large debt repayment falling due this year. This will have to be rolled over with more costly new loans amidst Sri Lanka being downgraded by rating agencies. The alternative option would be to start another IMF program or to borrow from large bilateral donor, both not very favourable for the country.
· Amidst such an economic backdrop, the government has projected a high GDP growth for the next few years. While these levels of growth had been achieved earlier, they were backed by investment in urban real estate and infrastructure. Without adequate domestic savings for investment and declining global appetite for investment in real estate, aiming for high growth will require privatisation and concessions to the private sector to entice foreign capital.
· The alternative for a small developing state amidst a global decline would be to reset our ambitions and settle on lower levels of GDP growth and instead redistribute wealth. This needs to be achieved through a change in the economic structure where the inequalities are reduced. This also needs to be done in a manner where we do not allow external powers to exploit the country’s resources.
2. Limping merchandise exports: Gota should not make the same mistakes as the previous governments
By: W.A. Wijewardena
· Sri Lanka’s exports have been struggling. The failure of previous governments to act upon the vital role of exports in economic development have hurt the economy. Despite policy statements during 2015-17 and Vision 2025 identifying the need for Sri Lanka to enter global value chains, exports remain at a level similar to the 2012-14 period.
· While the new export strategy in 2018 proposed to develop six selected areas, it did not expand on the main strategy proposed of joining global value chains. The targets presented could also be considered too ambitious for the current capacities of Sri Lanka. Achieving even a modest growth in export earnings in the next six-year period would require a special policy package.
· A lack of new products and having no proper action in developing export services have stunted export growth. The cost advantages Sri Lanka had in textiles are threatened by growing trends of on-shoring and near-shoring. Thus, in rescuing the country’s merchandise export sector, a comprehensive action plan, to diversify the exports and link them to global markets should be presented.
3. Why foreign earnings could solve the debt problem
By: Waruna Singappuli, CFA
· The external current account and the budget deficit tend to move in opposite directions. While import restrictions in 2019 contracted the current account deficit, the subsequent reduction in tax revenue widened the fiscal deficit. Both these factors, along with foreign earnings, drive the country’s debt levels.
· The need to borrow around USD 2 bn annually to finance this import bill (in addition to existing debt servicing) leads to calls for import restrictions. However, growth-focused long run measures such as moving importers towards value addition and import substitution activities can be preferable to import restrictions, as the latter can tend to weaken the economy and stifle growth.
· The sustainability of inflows to the Treasury market and FDIs are uncertain as they depend heavily on external developments. Instead, developing foreign currency earnings would be a more stable and sustainable solution to the debt problem. Despite this being cumbersome and time consuming, it is one of the most important measures to solve the country’s debt problems.
4. US-Iran standoff could hurt South Asia
By: Dinesh Weerakkody
· The recent tensions in the Middle East between USA and Iran have increased destabilisation in the region. While China has major interests in Iran, they will be careful to not hurt their ongoing trade negotiations with USA. These developments are critical for South Asia, where most economies are struggling with low growth and high inflation.
· While oil prices have risen, further escalations can threaten to disrupt upto 25% of the global oil traffic. This, along with the impact on Middle Eastern demand for South Asian labour can have negative implications. Also, the tensions have resulted in investors moving away from emerging market bonds and stocks, to the safety of the USD and gold.
· The higher potential for escalation in tensions creates more uncertainty in the region. While escalations would be disastrous for South Asian equity markets, subsequent increase oil prices would lead to inflation. South Asian markets will certainly have to rely on their central banks to protect them from any future global shocks.
(Compiled by: Chayu Damsinghe, Promodhya Abeysekara, Asel Hettiarachchi & Eshan de Mel)