Spotlight: Econ Op-eds in Summary (Week ended 3rd March '21)
1. Budgetary pressures restrict monetary policy space
By: Professor Sirimevan Colombage
The government has had to excessively rely on the Central Bank to finance the growing fiscal deficit in recent months, resulting in a rapid increase in money supply. This has been done through the purchasing of Treasury bills in primary auctions, where the CBSL would then issue an equivalent amount of currency in return, leading to a 23.7% YoY increase in money supply over the last 12 months.
Critics would argue that money printing amounted to Rs. 650 Bn in 2020. However, this figure was wrongly arrived at by computing the difference between the CBSL’s Treasury bill holdings over the year. The correct computation, which takes into account the changes in the monetary base, shows that the actual amount of currency issued by CBSL or newly printed money was only Rs. 31.8 Bn in 2020.
Despite the correct computation being lower than critics say, currently, the ability of the Central Bank to control inflation has been constricted by the debt burden faced by the government. Although the Fiscal Management Responsibility Act (FMRA) introduces strict fiscal rules to maintain fiscal discipline, authorities have failed to comply with these rules. It is thus prudent to reactivate the FMRA to enhance fiscal discipline and free the CBSL from political pressures.
2. Cabraalnomics: ‘No default because we have enough forex inflows to pay ISBs’
By: W.A. Wijewardena
Standard Chartered Bank and Barclays Bank, had recently shown concerns about Sri Lanka’s debt repayment capacity, downgrading Sri Lanka’s ISBs to underweight status advising to reduce exposure to the bonds. According to them, due to fast draining foreign exchange reserves, things would be critical for Sri Lanka unless the country goes for an IMF-backed debt restructuring.
The state minister Ajith Nivard Cabraal argues that the percentage of ISBs of total external debt is quite small, meaning there should be no worries about repayment. While his numbers are different to actual numbers, his arguments aren’t invalidated based on ‘flows of foreign exchange inflows’ rather than the ‘stock of foreign assets’. The argument is based on the simple premise that the debt repayment capacity depends both on the annual income and the amount of assets held by the borrower.
The argument, however, has two caveats. One is, while the inflows would strengthen the repayment ability, cash available for debt repayment will depend on how much of net cash is available after paying out normal bills. The other is trying to achieve the impossible trinity. Given these caveats, the country is expected to take a hit in the form of making foreign exchange available for debt repayment by cutting domestic consumption which carries social, economic and political consequences.
(Compiled by: Chayu Damsinghe, Promodhya Abeysekara & Malitha Goonerathne)
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