Spotlight: Econ Op-eds in Summary (Week ended 21st April '21)

Snapshots

1. Sri Lanka’s central bank should guard against bankruptcy as Fed lights commodity fires

By: Bellwether

• Sri Lanka is running low on reserves and the rupee has depreciated continuously over time. With the country unwilling to obtain IMF support, the Central Bank now faces the issue of taking on excessive swaps, where any default on a swap is legally regarded as a default. IMF transactions, unlike swaps do not expand the monetary base when given to the Central Bank and only results in a net foreign reserve increase, which must be paid back in forex as well.

• Running out of reserves is not a severe problem, if the Central Bank is willing to freely float the currency and the IMF allows for it. However, there may be a lack of political will to do so as it could result in a complete meltdown as shown in other countries in the past.

• A recovering economy and rising Fed rates can result in further disruptions in the exchange rate, given reckless Modern Monetary Theory style liquidity injections being made and interest rates being at historic lows. Worsening the impacts, floating the currency will not work in 2021, due to issues of excessive central bank swaps, credit downgrades, the likelihood of defaults and a possibility of bank failures among other factors. As such, pre-emptive action by the CBSL needs to be taken before the economic crises worsens

For the full article – Refer Economynext

2. Is Sri Lanka’s debt problem a dramatised story?

By: Prof. Sirimevan Colombage

• At its most recent Monetary Policy Review meeting, the CBSL viewed debt settlement as a smooth operation, and thus, downplayed the gravity of the debt burden amidst fiscal deterioration and balance of payments difficulties. However, as a result of declining tax revenue the budget deficit (% GDP) for 2020 is expected to widen to the likes of 12% which would require more funding.

• In addition, weakening of the rupee results in an increase in the rupee cost of foreign debt repayments and interest payments. It leads to further increase in Government expenditure and a deterioration of the budget deficit, requiring to raise fresh loans. In the short run the debt servicing capacity of the country is expected to be boosted by an IMF SDR allocation. However, authorities have indicated its unwillingness to enter into a more longer-term arrangement with the IMF.

• The CBSL has introduced several interim measures in recent weeks to ease the external payments situation and the debt burden. Such measures coupled with the bilateral swap arrangements and other foreign borrowings may be imperative to meet the immediate debt commitments. However, such efforts would be futile in the medium and long run without addressing the root-cause of the debt problem. As such, committed fiscal consolidation agenda, is imperative not only to reduce the future borrowing requirements, but also to boost investor confidence.

For the full article - Refer Daily FT

3. Proceed with caution Is Sri Lanka’s approach to import substitution sensible

By: Pathfinder Foundation

• After the pandemic there was a rise in protectionism, this was mostly fueled by supply side shocks. Further this exposed the weaknesses of complex supply chains that restricted the cross border production. However overtime, globalization was back on track on account of access for vaccines by different manufactures as well as remote working and living arrangements. Central bank’s and treasuries took immediate policy changes to expedite the recovery.

• In Sri Lanka, the policy decisions were more biased towards import substitution and protectionism. Import controls specially on manufactured goods had proven not to conserve forex but rather misallocate resources and create poor quality products with higher prices for helpless consumers. It further strengthened small and inefficient firms that serve domestic markets. These firms will never be export competitive. Thus, dragging the whole economy towards disaster.

• A different approach was practiced by East and South Asian countries. It had more trade liberalization, attracted more FDI and know how. This led to export expansion. Thus, Sri Lanka should focus on increasing productivity rather than import substitution. More focus should be on a production economy with high productive agriculture sector. It should never be on rent seeking individuals by import restrictions.

For the full article – Refer Daily FT

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