Spotlight: Econ Op-eds in Summary (Week ended 17th March '21)
1. Money printing does not lead to inflation
By: Dr. Kenneth De Silva
Sri Lanka can achieve a 6.5% - 7% growth rate in 2021, given the current coordinated and aligned macro-economic policy framework targeting growth. The downgrades in credit rating will only have a muted impact on growth given that credit lines will remain available for banks engaged in international trade finance. On the back of this, the securing of the US$1.5 Bn swap from China serves as a blow to doomsday advocates, who harped on about default possibilities.
Money printing does not lead to inflation, rather it is a myth proven globally. Many Central Banks have resorted to monetary stimulus in recessionary periods without severe consequences on inflation. Similarly, the monetary policy adopted by the CBSL would not be inflationary given that domestic and global demand have excess production capacity at the moment.
Policies such as the conversion of export proceeds to be handed over to the CBSL are reasonable in the current circumstance. There are no easy adjustments to be made for these policies, as Sri Lanka is currently faced with the choice of permitting consumer imports and plunging it into further debt or going through a restructuring of its national balance sheet. Support by the IMF through structural adjustments have not helped Sri Lanka be free of its vicious import dependent cycle, all the while permitting the depreciation of the currency on multiple occasions.
2. Sri Lanka debt crisis trapped in spurious Keynesian ‘transfer problem’ and MMT
While money printing and low interest rates have contributed to the economic woes of Sri Lanka, the main problem lies in a Keynesian mis-understanding of international trade and capital flows that is generally called the ‘transfer problem’
Based on this thinking, countries are unable to make repayments due to a trade deficit. As a result, countries needed to boost exports and make them more competitive through reduced domestic costs. This thinking is what led to real effective exchange rate targeting. However, in reality, the trade deficit itself is caused by foreign borrowings which improves the purchasing power and hence the demand for imports.
Printing money worsens the condition as imports then rise due to not just foreign borrowings but also due to foreign investments as the value of the currency weakens. Sri Lanka needs to realize this. And in order to obtain the necessary money to solve the budgetary issue and to repay the loans Sri Lanka either needs to increase taxes or Treasury auctions need to be successful.
(Compiled by: Promodhya Abeysekara & Malitha Goonerathne)
Disclaimer: This information has been compiled from sources believed to be reliable but Frontier Research Private Limited does not warrant its completeness or accuracy. The bullet points provided for each summarised opinion article is written by Frontier Research and has no connection to the respective author. Furthermore, the information contained in these reports/emails are confidential and should not be shared publicly. Disclosure, copying and distribution is strictly prohibited.