Spotlight: Econ Op-eds in Summary (Week ended 19th January '21)
1. Sri Lanka’s sovereign foreign debt to restructure or not
By Dr. Dushni Weerakoon
Given the current economic conditions of Sri Lanka there’s a push towards debt restructuring b man parties. Sovereign debt restructure could be pre-emptive or post default. A pre-emptive restructuring is better compared to the latter. Today, a restructure had become complex compared to past due to more countries burrowing from international bond markets, private investors and lenders such as China.
Even though there has been progress in governance frameworks to deal with sovereign debt crisis, considerable gaps still exist. Given the research evidence that countries that have defaulted on their debt obligations in the past are more likely to default again in the future, creditors have an added incentive to enter negotiations for restructuring than to endure a default.
High uncertainty during a restructuring, and the risk of prolonged negotiations means debt restructuring is still the last resort, to be done only if you must. As such, the decision to restructure should be taken only after excessive net benefit calculation, where policy makers should assess whether the country’s economic conditions will worsen further without a restructure or whether a timely restructure may return debt to sustainable level with lowest cost.
2. Sri Lanka has to hike rates, tourism recovery will not help end forex crisis
Sri Lanka should raise interest rates immediately and float the currency without too much delay to put a end to the ongoing misery on the import trade and head off a monetary meltdown and shortages that will lead to severe social unrest as well as default.
At the current policy rates, and sterilization, forex problems will get worse, and the non-financial sector will get hammered from the fallout. For the diversion of dollars to happen, rates must rise. The biggest mistake a central bank can do is to accommodate the harvest failure with more money printing and low rates.
The pick-up in tourism will not help with the foreign exchange shortages, though it certainly has the potential to generate more savings at the correct interest rate. Owners of hotels will do urgent repairs and later pay back loans which will also be loaned back to others, which will trigger more investments and imports.
(Compiled by: Promodhya Abeysekara, Malik Nazahim & Mariyan Perera)
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