Spotlight: Econ Op-eds in Summary (Week ended 25th November'20)
1. Sri Lanka seeking IMF bailout looks inevitable
By: Shihar Aneez
· If Sri Lanka cannot increase its foreign exchange revenue by an additional $4 Bn USD, the country will likely face a sovereign default for the first time in history. In line with this, 2021 will be the start of a series of the hardest years ahead in terms of economic management as foreign debt repayments amount to $4.5 Bn annually till 2025.
· Rolling over debt at a lower cost could help sustain Sri Lanka’s debts. However, the rating agency downgrades earlier this year would mean exorbitantly high borrowing rates in the future. Recent undersubscriptions of auctions also reflect Sri Lanka’s inability to raise further debt to finance interest payments. In this backdrop, Sri Lanka’s options to seek borrowing from international capital market remain limited.
· Other options for financing include syndicated loans or an RFI from the IMF. However, there currently is a delay on the existing IMF EFF arrangement due to COVID-19. The second COVID-19 wave puts further pressure on an economic slowdown, the worst since 2001. All these conditions could result in Sri Lanka’s ability to service its debt falling to its weakest level historically.
2. Budget 2021 in the context of the COVID-19 pandemic
By: Prof. Sirimevan Colombage
· The Budget 2021 focuses more on growth and maintaining policy consistency. This has the effect of not having direct action proposed to deal with the country’s debt issues. Thus, the budget deficit in 2021 is likely to be much higher than what is given in the official projections due to inevitable revenue shortfalls and expenditure overruns amidst the pandemic.
· In financing the widening budget deficit, increased reliance on bank borrowings results in liquidity injections, and consequent pressures on the money supply, inflation and balance of payments. On the other hand, the import restrictions imposed recently to arrest the balance of payments deficit could also have adverse consequences on competitiveness, productivity and export-led growth in the long run.
· Meanwhile, the response of the private sector to monetary easing seems rather weak due to structural factors while cheap credit has encouraged extravagant consumption, speculative asset holdings and risky financial dealings. Thus, a systematic growth strategy, backed by a realistic macroeconomic framework, is essential to recover the economy.
3. Time to reset China-Sri Lanka relations for a Biden presidency?
By: Ganeshan Wignaraja
· With geopolitical considerations between the US, China, and India affecting Sri Lanka, there have been numerous concerns raised on Sri Lanka’s ties to China. These range from economic costs of debt and investment, as well as questions of national security and political alliance.
· However, most investments in Sri Lanka by China have been generally positive. Investments in infrastructure have been especially helpful, as is the Colombo Port City project – which is expected to transform the services industries in Sri Lanka in the future.
· In order to continue receiving such benefits while also allaying concerns of allies like India and the US, Sri Lankan authorities will have to continue following a non-aligned path. This will help strengthen Sri Lanka’s economy and also continue to get trade related benefits from the US, and help Sri Lanka get out of persistent macroeconomic pain.
(Compiled by: Chayu Damsinghe. Promodhya Abeysekara, & Malitha Goonerathne)
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