Spotlight: Econ Op-eds in Summary (Week ended 22nd July '20)

Snapshots

1. C-19 economic recovery: Most probably it will be a flattened U-shaped one

By: W.A. Wijewardena

· Economic growth in Sri Lanka had been slowing down prior to the pandemic amid a twin deficit situation. Debt servicing issues and currency depreciation has also placed pressure on reserves. Achieving a 6.5% economic growth target by 2025 is only possible if a quick economic recovery is made and future negative economic shocks are absent.

· However, among the factors impeding the achievement of this target are costly tax reforms resulting in the erosion of the revenue base. The lead time on the new tax system could drive public debt to unaffordable levels, as seen by the debt stock rising to 90% of GDP by the end of April 2020.

· Given this backdrop, growth will be negative in 2020 and recovery will take a flattened U-shape. Eroding investor confidence has led to high costs for external financing, resulting in domestic borrowing from inflationary sources. If Sri Lanka is to aim for a V-shaped recovery, it must first attain sufficient fiscal space to undertake expenditure programs.

For the full article – Refer the Daily FT

2. A return to import substitution won’t deliver rapid growth

By: R.D.R. Jayampathi

· The import restrictions put in place in March in Sri Lanka were not only aimed at managing a Balance of Payment crisis but also promoting domestic industrialization. While this is possible due to the reduction in the import trade in the short run, there are questions on the ability of domestic industry to stand up beyond this.

· Domestic industries that export products could continue to be negatively affected, if imports of their inputs are restricted. Problems may also arise for intermediate industries using these as inputs if the quantity of output ends up being inadequate or is of low quality.

· Such weaknesses in domestic industry could also mean that the related service industries as well as government revenue could too suffer. If domestic industry doesn’t take off, it could also result in shortages in the local market. Such a situation might even result in social unrest, as Sri Lanka’s past proves. Such factors need to be considered within these policies as well.

For the full article – Refer the Daily FT

3. External reserves decline as strengths in balance of payments weaken

By: Nimal Sanderatne

· Sri Lanka’s Balance of Payments is likely to be under stress this year due to the large trade deficit, and weak remittances and tourist income. This could diminish external reserves to a critically dangerous level by the end of the year and pose a severe threat to the economy.

· The trade deficit could be somewhat contained, as falls in imports keep up with the large decrease in exports. However, as more and more people return from overseas, remittances could decline further, and the closure of international travel can be very negative on tourism receipts.

· A reversal of these negative trends will only take place once the global economy has recovered, and international assistance is imperative to stave off a financial crisis in the meantime. This necessitates sound economic management and insightful international diplomacy.

For the full article – Refer the Sunday Times

(Compiled by: Chayu Damsinghe, Promodhya Abeysekara & Eshan de Mel)