Spotlight: Econ Op-eds in Summary (Week ended 1st February '21)
1. Sri Lanka use of reserves for imports is a deadly false choice
An IMF program will be accompanied by a debt restructuring, rate and tax hikes. They will not permit the usage of reserves for imports as Sri Lanka would otherwise default on the restructured debt. Given this, imports need to be financed by inflows into the country, and can only be done at the correct interest rate. However, the country doesn’t have a working currency regime and the LKR needs to be floated.
Central bank dollar sales, if unsterilized, create liquidity shortages in the interbank market, which will lead to further imports and loss in reserves. Although financing from India has helped alleviate short term pain, an IMF program is needed for the economy to correct itself. If more money is printed for the relief package announced earlier this year, it would only put more pressure on rates to rise.
Problems faced in recent months are, similar to Latin America, as Sri Lanka faces power cuts, food shortages and a pegged currency. Given this, current import controls will hurt businesses in the long run, and may even result in bank runs and the debt to GDP ratio skyrocketing. Sri Lanka is heading for more pain, and the sooner it goes for a correction, the less painful it will be for the economy.
(Compiled by: Promodhya Abeysekara & Malitha Goonaratne)
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