ECONOMYNEXT – The International Monetary Fund has said Sri Lanka’s gross domestic product would contract 0.5 percent n 2020, down 4.0 percent from an earlier growth projection of 3.5 percent as the country grapples with Coronavirus and the currency has been hit by monetary stimulus.
The IMF is forecasting zero growth for Asia overall in 2020, which has not happened for 60 years.
India is still projected to grow at 1.9 percent and China 1.2 percent. Emerging Asia will still grow at 1.0 percent. World output was expected to shrink 3.0 percent in 2020.
Most countries have put full lockdown except for countries like Vietnam and Korea which are contact tracing aggressively but are on partial lockdowns.
Sri Lanka is also contact tracing aggressively, having started early, which some observers believe is ahead of Korea and may be behind Vietnam whpse
But the country has also put tight lock-down style curfews to plug any ‘leaks’ in contact tracing and the lack of random community testing to find asymptomatic cases.
Public services and health sector is intact with only 233 confirmed cases and perhaps two clusters for which index cases from abroad has not been found.
But the curfews have hit the real economy and the currency is under pressure from liquidity injections.
“The first priority is to support and protect the health sector to contain the virus and introduce measures that slow contagion,” Changyong Rhee, IMF’s Director of the Asia and Pacific Department told reporters at a briefing on the economic outlook for Asia Pacific countries.
“Targeted support to hardest-hit households and firms is needed. This is a real economic shock unlike the Global Financial Crisis. Protect people, jobs and industries directly, not just through financial institutions.”
Unlike free floating exchange rates, countries with soft-pegs (central banks that collect forex reserves but also buy government bonds to inject liquidity and lower interest rates out of sync with the balance of payments and domestic credit trends) that try monetary stimulus can be hit by external meltdowns with fleeing investors, downgrades and in cases default, analysts have warned.
Such contradictory monetary arrangements which necessarily result in frequent balance of payments troubles are also referred to as ‘non-internationalized’ currencies.
“If the situation deteriorates, many emerging economies may to be forced to adopt a “whatever it takes” approach, despite their budget constraints and non-internationalized currencies,” Rhee said
“In many cases, they will face policy trade-offs. For example, central bankers are considering buying government bonds in the primary market to support critical financial lifelines to smaller firms and households to avoid mass layoffs and defaults.
“An alternative to direct monetization could be to use the central bank’s balance sheet more flexibly and aggressively to support bank lending to small and medium-sized enterprises through risk-sharing with the government.
Sri Lanka however has already monetized debt, cut reserve ratios and also injected excess liquidity oversupplying cash to the credit system, which has also seen large cash drawdown amid lockdown style curfews.
In the pst balance of payments trouble in years without any external problems including April and July 2019 and the first quarter of 2015, and 2011.
Rhee said countries that face external trouble after monetary stimulus may use capital controls temporarily provided a clear exit path is shown.
Sri Lanka has already slapped exchange controls for three months and import controls.
The monetary troubles have come on top of an an earlier ‘stimulus’ through unexpected tax cut had already damaged Sri Lanka’s budgets and spooked rating agencies.
In the past rating agencies have downgraded Sri Lanka not on deficits, but on monetary instability and reserve losses triggered by liquidity injections, analysts have pointed out. (Colombo/Apr16/2020)