Spotlight: Econ Op-eds in Summary (Week ended 25th September '19)
1. Will reduction of policy interest rates spur economic growth?
By: Nimal Sanderatne
· The Central Bank of Sri Lanka has reduced policy interest rates with the aim of stimulating the economy amidst low inflation levels. This decision was further supported by global interest rate reductions. While these low interest rates, supported by rupee appreciation, is beneficial for businesses, it alone will not promote investments.
· Political and economic uncertainty have further deteriorated with the current election climate. This could lead to fiscal slippages and inflationary pressures which reduced the positive impact of lower rates. Additionally, a change of government could negatively impact trade with Western nations which are the main markets for Sri Lankan exports.
· On the plus side, lower trade deficits, sooner than expected recovery in tourist arrivals, stability in remittance flows, and mixed foreign financial flows have led to a rupee appreciation this year. Recent depreciation pressures are expected to be short lived. Therefore, the available policy spaces should be utilised to support productive economic activities.
2. Small is not that beautiful
By: Dr. Sirimal Abeyratne
· The stock market is a barometer of the economy at the macro level and of companies at the micro level. Such a measurement of the economy is based on the performance of investments by investors who are motivated by long-term economic and company performance. This, however, reflects only a part of the buyers and sellers in the market.
· The remaining buyers and sellers are speculators who want to buy at a low price to sell at a higher price as soon as possible. This segment becomes an issue when the market is too small where someone who has a sizable amount of money in hand has the ability to buy low and drive the prices up, then sell high, and get out.
· The issue becomes more significant when the government is one of those big players. While the government could make a positive impact using a public fund like the EPF, it could also allow speculators to sell at higher prices and leave the market. This is a major issue given that Sri Lanka is the “smallest” among the Asian stock markets, an issue which should be solved at a policy level.
(Compiled by: Chayu Damsinghe, Promodhya Abeysekara & Asel Hettiarachchi)