ECONOMYNEXT – Sri Lanka’s growth performance has been volatile and has been repeatedly arrested by balance of payments troubles, Ricardo Hausmann, an economist from Harvard University said.
Hausmann said Sri Lanka’s recent growth spurts had been accompanied by widening the external deficit in goods and service and then there was a sharp reversal.
"What you see is these booms in growth which are accompanied by a widening of the external deficit," he told an economic forum in Colombo, Thursday.
"And if you are unable to sustain the widening of the external deficit something has to stop, and growth declines.
"And then you get to the next boom, again the external deficit, then the growth slows."
He said each time the economy ran faster ‘than the speed limit’ the currency depreciated.
"So I asked myself whether exports and the balance of payments was a constraint to growth," he said.
Analysts have however pointed out that the booms and busts were caused by Sri Lanka’s money printing central bank which resists interest rate hikes as credit growth picks up and precipitates balance of payments troubles and currency collapses.
The wide external deficit is made possible by external borrowings and also the run down of foreign reserves during the money printing and high domestic credit growth period.
Reserves re-collected after a sharp correction in the interest rate causes the credit bubble to collapse.
Economists have called for a modified Singapore-style, a more orthodox Hong Kong style currency board, or at least a central bank with less discretion to print money and cause bubbles to be re-established to regain economic stability.
Though Sri Lanka aspires to be like Singapore it is sitting on a rotten foundation in terms of the monetary system, they have said.