Spotlight: Econ Op-eds in Summary (Week ended 10th March '21)
1. Central Bank needs to tackle macroeconomic challenges instead of piecemeal solutions
By: Professor Sirimevan Colombage
At last week’s Monetary Policy Review meeting, Officials emphasised the CBSL’s commitment to keep interest rates down and to avoid exchange rate depreciation. However, it is impossible to achieve this without allowing capital outflows according to the theorem of policy trilemma. In trying to achieve this impracticle goal, the CB has confined its policy stance to specific industries and, in the process, has failed to tackle economy-wide challenges.
The Governor has stated that the CB is using an alternative economic model, which is not yet revealed. However, this model seems to carry some of the pre-liberalisation period policies, which hadn’t worked for Sri Lanka and other developing countries in the past. In one of these measures, for example, the government had turned to financing the budget deficit through bank funding, thus adversely affecting the banking environment.
It had also refused to obtain IMF support, despite the fact that doing so would reduce pressure on the BOP and would improve the country’s sovereign debt rating. Thus, the CBSL, as an autonomous body by statute, needs to urge the Government to improve fiscal discipline by eliminating its dependence on bank credit to finance the budget deficit, which is the root cause of current macroeconomic imbalances.
2. Increasing exports vital to improve 2021 trade balance and balance of payments
By: Dr. Nimal Sanderatne
A significant improvement in export earnings is required to bolster Sri Lanka’s trade balance, given that import expenditures are likely to rise due to numerous factors, including a recovery in oil prices and the revival of the manufacturing industry. The EDB targets $12 Bn in export earnings, with increased demand in apparel and rubber manufacturing contributing positively to this forecast.
Although demand for exports is expected to grow given the global recovery, two threats to growth would be in the form of possible trade sanctions imposed by the EU and a failure in the revival of agricultural exports due to current disruptions in estates. These disruptions outline the need for a long-term strategy to increase production for agricultural exports.
Workers remittances which were $7.1 Bn in 2020 are unlikely to remain at this level for 2021, given the repatriations of migrant workers back to Sri Lanka. Whether the rest of the year faces high levels of BOP pressure is dependent on whether the tourism industry can recover sufficiently and whether the $1.5 Bn provided by China is large enough to meet debt repayments.
(Compiled by: Promodhya Abeysekara & Malitha Goonerathne)
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