Spotlight: Econ Op-eds in Summary (Week ended 23rd October '19)
1. Political uncertainty of presidential poll retards economic growth
By: Nimal Sanderatne
· Political uncertainty in the run up to the presidential elections and beyond can slow down the economy. Therefore, a full economic recovery in 2020 after an expected slow growth in 2019 is unlikely. Until a stable government is made following the parliamentary elections, political stability and policy certainty cannot be established.
· Political stability after the presidential polls depends on if the new president is able to work with the current parliament. If not, a constitutional crisis like that of October 2018 is possible. If no candidate gets 50% majority even after second preference, any conflict over the final winner can still lead to political chaos.
· Lack of clarity on the constitutional powers of the new president under the 19th amendment further fuels this uncertainty. While most developed economies today are under political turmoil, their economies are not dependent on state policy unlike Sri Lanka that relies on the state for a stable economic and business environment.
2. Elections and economies: How will our economy deal with all this electing?
· The upcoming presidential election and the subsequent parliamentary election is likely to add additional costs onto the economy. With both sides promising large expenditures, the fiscal deficit could expand, moving beyond 2019’s expectation of 4.8% to well over 5%. Financing this could cause interest rates to rise for the whole country.
· Sri Lanka is already likely to have to pay around US$ 4 bn every year until 2022 in debt servicing costs. Further fiscal deficits, and borrowings to finance such deficits, would only worsen the country’s already precarious debt position. The possibility of rising imports after the election and subsequent BOP worries are also likely to add pressure to the country’s debt.
· These factors are likely to negatively impact Sri Lanka’s economic growth. The country has already been seeing a slide in GDP growth since 2012 (except for a spike in 2014), and the country hasn’t been able to grow its exports to its fullest potential. Unless proper and comprehensive economic reforms are undertaken, any economic recovery in 2020 is likely to be short lived.
3. Fixing lending rates and waiving farmer loans; two policies that do not augur well for borrowers
By: W.A. Wijewardena
· Recently, there were two policy announcements relating to lending to support faster economic growth. One was made by the presidential candidates, where a promise to write off debt was given to the farmers. The other was a lending rate cap by the CBSL with the hopes of getting banks and financial institutions to lower their lending rates.
· Low interest rates are expected to ease the working capital constraints of businesses and encourage them to go for permanent investments. Thus, when the banks and financial institutions did not lower their rates, despite lower policy rates, the CBSL ordered commercial banks to cut their lending rates by at least 2%, using the powers it possessed under the Monetary Law Act.
· However, policy makers have failed to realize that SMEs are indebted not to the formal banking institutions, but to the informal money lenders. Thus, the need of the hour is for the formal banking institutions to change their lending behavior and emulate informal money lenders when they meet the financial requirements of SME borrowers.
(Compiled by: Chayu Damsinghe, Promodhya Abeysekara & Asel Hettiarachchi)