Spotlight: Econ Op-eds in Summary (Week ended 6th November '19)
1. Post-election political stability crucial for economic recovery
By: Nimal Sanderatne
· Political stability is vital for economic recovery. Any conflicts between the newly elected president and the existing government, alongside the upcoming parliamentary elections are likely to delay political stability. A single party government that implements clear and certain economic policies and reforms, and also maintains ethnic harmony, is vital for economic development.
· This is especially important since Sri Lanka’s economic recovery was delayed by external incidents like political anarchy and the Easter Sunday attacks. Economic reforms, pragmatic policies and fiscal consolidation needs to be re-established. Such political and economic stability is vital for future Balance of Payment surpluses enabling us to service the mounting foreign debt of the country.
· Such economic reforms are further valuable looking into the future, as an ageing population means that transformative 4th Industrial Revolution technologies are a key driver of future Sri Lankan economic growth. However, the current political agendas lack plans to address above issues and are full of promises that would worsen the country’s economic problems involving low growth and high foreign debt.
2. Sri Lanka’s killer ‘flexible exchange rate’ strikes again
· A modern central bank, as a state agency, has more power along with the ability to issue paper money and depreciate the currency. In such an environment, the planned monetary reforms should be viewed cautiously. While the Central Bank now promises to end money printing, they in turn engage in open market operations to increase liquidity, resulting in a sliding rupee.
· The central bank also tries to maintain a floating exchange rate that is biased towards depreciation. When it buys dollars from the domestic forex market, market liquidity increases further. Such liquidity is bearable because of the increase in international reserves, and the liquidity can be reduced when selling dollars.
· When the dollars are sold, the call money and repo rates should go up as excess liquidity is absorbed. However, things don’t always happen in such a stable manner. The use of swaps to obtain reserves and the use of various ways to inject or drain liquidity affects market stability. This needs to be kept under control through strict policies and laws.
(Compiled by: Chayu Damsinghe, Promodhya Abeysekara & Asel Hettiarachchi)