Spotlight: Econ Op-eds in Summary (Week ended 14th August '19)
1. Fiscal consolidation derailed by increased expenditure
By: Nimal Sanderatne
· Even though Sri Lanka achieved significant progress in fiscal consolidation from 2016 to 2018, revenue shortfalls and increased public expenditure after the Easter attacks are likely to derail the process. Populist expenditures targeting the forthcoming elections will likely lead to exceeding the targeted fiscal deficits of 4.8% in 2019 and 3.5% in 2020.
· Such populist measures could include increased employment and transfer payments, alongside other priorities like Enterprise Sri Lanka, security and compensation expenses for April violence, are likely to increase public expenditure. Furthermore, the increased rupee cost of debt servicing due to depreciation would to this. On the revenue side, slow economic growth, setbacks in tourism and imports are likely to lead to tax revenue shortfalls.
· This expansion in the fiscal deficit will generate greater inflationary pressures, negatively impact the balance of payments position and worsen the country’s debt burden. With this irresponsibility been inherent to the Sri Lankan political economy, election years become severe constraints to the fiscal consolidation process.
2. The issue of an independent Central Bank Should it be or should it not be
By: W.A. Wijewardena
· The prospect of a new Monetary Law Act (MLA), to improve the independence of the CBSL, has given rise to a debate on its pros and cons. The central bank’s independence is important given that the people trust the central bank to preserve the value of their money and avoid inflationary pressures.
· In Sri Lanka, the current MLA restricts the Finance Minister from giving directives to the central bank. Such directives are only given as the last resort when the monetary board and the government cannot agree on a policy, where the government will have to take responsibility for the implemented policy. In essence, this provides the bank with both policy and budgetary independence.
· Such independence allows the employees to work independently and the bank to incur interest expenditure to absorb any excess liquidity. This in turn would result in the citizens’ money being free of undue interference from politicians. Thus, the central bank’s independence is important and desirable as pointed out by many ex-governors, despite the critics pointing out that monetary and fiscal policies should work in tandem and that a little inflation is always desirable for a developing economy.
(Compiled by: Chayu Damsinghe, Promodhya Abeysekara & Asel Hettiarachchi)
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