Spotlight: Econ Op-eds in Summary (Week ended 25th August '21)

Snapshots

1. Rise of the black economy and shrinkage of Government power

By. Dr. W.A Wijewardena

• The CBSL has decided to change its policy stance by raising rates in their most recent monetary policy meeting, in light of the CBSL wanting to ease external sector pressures and curb any excessive buildup of inflation. However, this rate increment is too little and too late, as real interest rates still remain negative. This decision comes

• The policy changes implemented over the last year have cost the government in terms of tax revenue and have resulted in accelerated levels of money printing alongside the imposition of import controls. Further, with foreign reserves being depleted, the CBSL has been unable to maintain the exchange rate at Rs. 203 to the USD.

• This has paved the way for a thriving black market, with the margin on black market transactions being Rs. 40 greater than the official exchange rate and the rate having recently risen to Rs 260 per dollar. The black market has also thrived as a result of the imposition of an MRP on paddy, sugar, rice and coconuts, ultimately reducing the powers of the Government and CBSL to control the economy.

For the full article – Refer Daily FT

2. Tight monetary policy overpowered by Government borrowings from banks

By Prof. Sirimevan Colombage

• Last year the CBSL adopted low interest rates and selective credit concessions, in order to expedite the economic recovery. This along with purchase of Treasury bills and bonds in the primary market by the CBSL and increased credit to government by commercial banks, all directly increased the circulated money supply. Ultimately demand pressure lead to inflation and high imports. CBSLs’ attempt to interfere into the rupee depreciation led to increased black market activities in forex dealings.

• Last week the CBSL turned towards monetary tightening measures as it started losing its grip on both exchange rates and interest rates. However, the CBSL continue to deny that money supply has any impact on inflation. According to the CBSL the depreciation of the rupee was due to the limited conversions by exporters and the advancing of imports together with a certain amount of speculative activity.

• Easy monetary policy adopted so far has resulted in negative real interest rates, discouraging both saving and investment. Newly introduced monetary policy restrictions will not be effective unless public sector borrowings are curtailed. Finally, more close coordination between fiscal and monetary policy is needed to resolve the economic situation of the country.

For the full article – Refer Daily FT

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