Spotlight: Econ Op-eds in Summary (Week ended 22nd September '21)

Snapshots

1. How Sri Lanka’s IMF-backed ‘Young Plan’ fired a foreign debt death spiral

By: Bellwether

• Sri      Lanka has seen a surge in foreign debt since 2014, as budget deficit’s      continued to grow alongside unstable monetary policy. The inflation      targeting framework imposed at the time led to a strong depreciation of      the currency, with the Central Bank injecting excessive liquidity, leading      to a growth in ISB debt.

• Sri      Lanka is in a ‘death spiral’ due to monetary instability, with nearly half      the budget deficit being financed through foreign sources. The current      strategy to reduce foreign debt has seen the foreign deficit in 2020 being      recorded as a net payback, albeit coming at the cost of running down      reserves.

• The      IMF SDR allocation will help provide respite to reserves, although      interest would have to be paid on their allocation, thus, the country’s situation      must be assessed using net foreign assets, which do not account for SDRs      or swaps. The government must focus on ensuring bond auctions are      subscribed prior to further policy rate hikes.

For the full article – Refer Economynext

2. CB likely to continue money expansion, direct controls

By Prof. Sirimevan Colombage

• CBSL      has increased money supply since last year, due to continuous borrowings      by the Government from the CBSL and commercial banks. The trend is mostly      likely to continue as the government does not have any other funding      sources. In addition, the CBSLs monetary space had also become limited due      to fiscal dominance.

• The newly      appointed CBSL Governor strongly denies that there is any correlation      between money supply and inflation. He believes that excess money issues      can be absorbed by CBSL whenever they require. However, CBSL’s recent drop      of Open Market Operations and recent heavy under subscription to ISBs      suggests otherwise.

• CBSLs      more direct monetary controls including interest rate caps, credit      ceilings and exchange rate fixing, and abandonment of inflation      targeting,is expected to affect free market activity negatively. Thus, in      order to stabilize the economy CBSL will have to move towards market based      monetary policies while managing the pressures for monetary expansions.

For the full article – Refer Daily FT

(Compiled by: Promodhya Abeysekara, Malitha Goonerathne & Mariyan Perera)