Spotlight: Econ Op-eds in Summary (Week ended 24th June '20)
1. Accelerating credit flows - Address structural issues first
By: W.A. Wijewardena
· Recently, the Central Bank decided to take measures to strengthen the recovery of the economy. The first of which was to cut the SRR to 2% and the second was to top up the special refinance fund to bring its balance up to Rs. 150 bn. These were taken to improve credit flows to the weakening Sri Lankan economy, both being measures to increase liquidity.
· However, Sri Lanka’s commercial banks are already running on excess liquidity which they park in the Central Bank, to earn a relatively risk-free interest compared to lending. This ultimately would prompt the Central Bank to bring down policy interest rates, affecting the interest rate structure of the country where depositors stand to lose.
· Low credit flows, therefore, occur not as a result of liquidity concerns, but structural issues in the system. Complex risk mitigation systems prevent large scale disbursement of funds, especially when the CRIB is used as an eliminator rather than an indicator in providing credit. Addressing these concerns with proper credit guarantee will be more prudent to bring funds to the ailing economy.
2. National debt status and future directions for raising debt in international markets
By: Shamika Ramanayake
· While advanced economies following principles of ‘Modern Monetary Theory’ can take on sovereign debt comfortably due to negative interest rates and low interest regimes, this is not a viable path for emerging economies. Factors such as currency weakness, higher interest rates and intricacies in capital flows inhibit this.
· Sri Lanka is no exception, and persistent fiscal and current account deficits have resulted in spiralling national debt levels. This has necessitated Sri Lanka seeking debt assistance to manage its obligations. Despite seeing relatively moderate growth in recent years, the country’s debt obligations have risen to more dangerous levels.
· While it is important to attract investors through structural fiscal reform in the long run, Sri Lanka must also look to raise debt sustainably in the near term. To this end it can help to target Sovereign Wealth Funds (SWFs), Non-USD based bond issuances, tap into the green bond market and establish a National Investment Authority.
(Compiled by: Chayu Damsinghe, Promodhya Abeysekara, & Eshan de Mel)
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