Spotlight: Econ Op-eds in Summary (Week ended 29th April'20)
1. Covidonomics challenge for Central Bank Revive Keynes but clamp import controls
By: W.A. Wijewardena
· Sri Lanka was reaching macroeconomic stability when the Covid-19 pandemic bought the economy to a standstill. In such a situation, following the rest of the world, Sri Lanka adopted “Covidonomics” – a Keynesian like approach where the government is expected to save an economy deprived of demand for its output.
· Using such Keynesian policy can be a fundamental issue in the current world, because they would work very effectively only in a closed economy. In an open economy the money spent by the government would leak out from the economy in the form of imports, creating balance of payments issues. For Sri Lanka in particular, this is not an easy task, since the government budget now runs on a very tight rope.
· In such a situation, the government would have to turn to the Central Bank to finance. This can create pressure on the CBSL. As such, while the country might meet its short-term requirements through CBSL support, its medium to long-term adjustments should come from policy reforms making Sri Lanka’s market flexible for business.
2. Preparing for economic prosperity beyond the COVID-19 crisis
By: Dr. Pradeep Perera
· It is possible that industries focused on the domestic market may experience some relief as domestic consumption recovers over the next 03 months, after the curfew is lifted. The same cannot be said for Sri Lanka’s export industries due to the economic impacts in Sri Lanka’s key trading partners.
· The pandemic’s impact on Sri Lanka include potential reduction in remittances, reduction in tax revenues due to spending cuts and import restrictions. These developments combined with the high levels of external debt will amplify the twin deficit Sri Lanka faces.
· It is vital that stimulus measures such as debt moratoriums do not compromise the stability of the banking sector. Funding the fiscal deficit must also be done using non-inflationary sources. Sri Lanka must first bridge her deficits so that she can embark on a long-term revival plan with structural reform to diversify exports and attract FDI.
3. ‘The Great Lockdown’ and the Sri Lankan economy
By: Bhadraja Mullegamgoda
· The “Great Lockdown” will likely result in a recession that will eclipse the Global Financial Crisis of 2008. Fiscal stimulus to protect the economy is challenging as the pandemic has affected all dimensions of the economy. This compounds Sri Lanka’s lack of policy alternatives given existing fiscal constraints.
· The informal sector and SMEs may suffer the greatest economic hit, as global supply chains get affected as well. Recession in export markets along with relatively less effected import markets will result in a widening trade deficit too. Any continuation of the recent currency depreciation will compound the issue.
· It is important that policymakers consider the most effective alternatives given fiscal constraints. These may include developing business and entrepreneurship, strengthening and integrating with value chains, and reinforcing existing social safety nets.
(Compiled by: Chayu Damsinghe, Promodhya Abeysekera & Eshan de Mel)
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