Spotlight: Econ Op-eds in Summary (Week ended 27th January '21)
1. Sri Lanka facing 2021 with reckless MMT, stimulus mania
Sri Lanka is heading for one of the biggest economic challenges in its history in 2021, with reserves falling due to severely eroded confidence, from the tax cuts in 2019 and rate cuts and injections from January onwards as well as due to building upon REER targeting, call-money-rate targeting implemented by previous regimes.
To overcome this issue the Central Bank had resorted to printing money which had created excess liquidity. This is acceptable in an instance where the interest rates are hiked, and the currency is allowed to float. However, currently the government is trying to keep interest rates low and currency steady in conjunction with money printing, which could lead to a crisis.
With a ‘CCC’ credit rating it is very difficult to recover from the crisis of falling reserves and high debt repayment. That is where an IMF program with a debt workout if possible, will help. As such, What Sri Lanka needs now is a complete reversal of policy towards sound money, strong property rights, and policy stability.
2. Sri Lanka’s Post-COVID-19 Recovery: The Need for Inclusive Economic Growth
By Wimal Nanayakkara
Sri Lanka was only at Upper Middle-Income Country (UMIC) status for a year before being revised downward due to stagnating economic growth and a revision of the threshold for UMICs by the World Bank. This, compounded with the impact of COVID-19 and high levels of inequality makes the task of achieving UMIC daunting.
COVID-19 affected key sectors in the economy, including tourism, remittances and exports. The number of individuals indirectly affected by COVID-19 in the tourism sector could be as high as 1.5 million. Although remittances were negatively impacted over the first half of 2020, remittances hit a historic high in December 2020.
Future growth strategies need to be inclusive, with equitable and quality education and skills development. In terms of the development of the agricultural sector, modernisation and guidance to increase productivity are required to minimize post-harvest wastage. Targeted social safety nets and the encouragement of female labour force participation are also important policies needed to be highlighted for inclusive growth.
(Compiled by: Chayu Damsinghe, Promodhya Abeysekara & Malitha Goonerathne)
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