Spotlight: Econ Op-eds in Summary (Week ended 24th February '21)
1. Sri Lanka has to fix monetary instability, budgets to avoid default, sudden stop
Sri Lanka is currently facing both a liquidity and debt crisis, and monetary instability could be a prime cause for both. As more and more money gets printed and inflation rises, the currency weakens. This is similar to what happened in past depreciation crises in Sri Lanka.
This situation is worsened by the fact that Sri Lanka consistently has weaker fiscal policy, with taxation being below par and high expenditures mostly due to state enterprises and salaries. As a result, Sri Lanka’s Central Bank ends up printing money to finance these deficits instead of rolling it over.
To get out of the current situation, an IMF programme is a great first step to restore confidence in Sri Lanka. However, unless Sri Lanka abandons its policies of monetary injections and loose fiscal spending, and fixes its currency policy with a consistent one, any short term solution will remain just a short term solution.
2. Resolving the perilous external financial vulnerability
By: Nimal Sanderatne
Sri Lanka is in a debt crisis, with reserves falling to $5.7 Bn at end 2020 and foreign debt obligations worth $4.5 Bn due over 2021. To provide imminent assistance to this, the Government is negotiating a $1.5 Bn foreign currency swap from China. This funding is much needed, with the BOP position expected to worsen given a likely recovery of oil prices in 2021.
Economists have urged the government to seek multilateral assistance, in specific IMF assistance to meet debt repayments this year, citing that that they are low interest programmes due over a long period of time. The current government strategy of import controls and stringent control of the economy is reminiscent of the unsuccessful policies in the 1970 – 1977 period, and will not work now as well.
The 1970- 1977 period was accompanied by low economic growth and government policies creating shortages on basic items including food and clothing. Further reluctance by the government on negotiating an IMF agreement could lead to a period of extreme economic austerity in the future, as a last bid attempt to manage debt repayments.
(Compiled by: Chayu Damsinghe & Malitha Goonerathne)
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