Spotlight: Econ Op-eds in Summary (Week ended 31st March '21)
1. Government pushes panic button on FDI?
By: Indika Hettiarachchi
Sri Lanka recorded a 33% decline in FDIs up to the third quarter of 2020 compared to only a 4% decline experienced by Asian peers. The country also has been seeing a trend of declining ‘new foreign cash inflow’ - a big concern for the government, as FDI has been identified as a main source of foreign cash inflow to bridge the current account deficit.
Despite having a low score in the Ease of Doing Business index, which had been quoted as one of the main barriers for FDIs in the past, Sri Lanka has been able to attract FDIs mainly through substantial policy interventions targeted at specific industries and by putting in place initiatives to encourage local entrepreneurs to act as catalysts.
In order to absorb productive FDI, there must be a healthy local industrial base, supporting infrastructure and a foundation to develop value chains. Hence, it is vital to develop the local businesses as a catalyst. In order to do so, there have to be programs to boost local entrepreneurship and the capital market ecosystem.
2. Currency swaps to boost foreign reserves
By: Dr. Nimal Sanderatne
The government has a short-term strategy of using currency swaps to meet debt repayments for the year. The Central Bank of Sri Lanka will exchange up to $1.5 bn with China as a currency swap arrangement, and is able to repay obligations to China over three years, providing much needed support on immediate debt repayments.
Given confidence based on expectations of currency swaps from China, Bangladesh and India, the Government expects foreign reserves to increase to increase to $5.5 Bn at the end of 2021. However, the request for a currency swap from India hasn’t materialised yet. In order to obtain the swap, India would require Sri Lanka to negotiate an IMF arrangement, which the government seems unwilling to do.
Although currency swaps will ease immediate debt pressure, they will increase the countries overall foreign debt burden. Despite import restrictions, import expenditure is likely to increase given higher oil prices. Given this, a favourable BOP balance is crucial in reducing external financial vulnerabilities. This, however, would depend on the speediness of the recovery from the pandemic.
(Compiled by: Promodhya Abeysekara & Malitha Goonerathne)
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