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Monday April 22nd, 2024

Sri Lanka import substitution should be temporary: economist

ECONOMYNEXT – Sri Lanka should not extend an import substitution strategy beyond the short term as changes are taking place in world which the island should not miss out on an economist said, as the island is battling a new cluster of Coronavirus.

Sri Lanka has placed the worst import controls since the collapse of the Bretton Woods system of soft-pegs in 1971, after the country’s currency plunged in March and April amid liquidity injections.

Private credit has since weakened but the import controls are in place amid excess liquidity in money markets.

Sri Lanka has placed the controls despite battling Coronavirus better that most countries.

“Sri Lanka is not the only country that is re-thinking its trade policy,” Dushni Weerakoon, the head of Institute of Policy Studies, a Colombo base think tank said responding questions at a webinar during the release of its annual State of the Economy report.

“It has been in the cards since the global financial crisis, we have seen a push-back against globalization and Covid 19 I think is accelerating that process.”

“The priority for the countries is to provide employment; there is a sense that if we protect our industry, give and them a relief period in which to recover.

“This is an unprecedented economic shock. We have no idea as yet what is the scale of the crisis is on the Sri Lanka economy.

“We have not yet seen the second quarter GDP growth rates that would capture in absolute terms what has happened. So we are working in the dark.

“So to that extent is understandable that a certain degree certain degree temporary import protection is offered.

Anti-trade economist nationalists have raised their voices in the West as seen by Trumpism, after the Federal Reserve triggered a financial and asset bubble which collapse around 2008, leading to run on banks and job losses, triggering massive state interventions in its wake.

Similar trade controls were seen after the Federal Reserve fired the ‘roaring 20s’ bubble and triggered the Great Depression. In the US, 1930 the Smoot-Hawley Tariff Act came was passed.

In Latin America where commodity exports suffered, import substitution became popular.

State led industrialization in particular was popularized by Raul Prebisch, the creator of Argentina’s activist pegged central bank, which was expected to sterilize the balance of payments.

The central bank model which was adopted by the Fed’s Latin America department and replicated in many other Latin American nations and also in Sri Lanka, triggering repeated currency crises and leading to sovereign default in many cases, analysts have said.

As the non-credible pegs collapsed countries turned to import substitution to ‘save foreign exchange’ instead of fixing monetary policy.

Most East Asian nations (and Gulf nations) on the other had adopted an opposite strategy backed by monetary stability (currency boards or highly credible pegs), and grew economies with foreign investment and created global value chains as well as domestic consumption.

East Asian nations which actively wooed foreign firms also over turned a Prebisch linked ‘dependency theory‘.

Free trade allowed living standards to soar, most recently seen in Vietnam, which embraced free trade early and had no domestic business class to oppose it as large companies were all state owned. Japanese branded goods are cheaper in Ho Chi Minh City than in Tokyo.

Ironically the push back against free trade in the West by nationalists and mercantilists during the Great Recession had come against East Asian industrial goods, while Latin America which pushed for import substation is still having currency troubles and sovereign defaults.

Meanwhile Weerakoon said there were new global developments that were taking place which Sri Lanka should not ignore.

“The sensible option is to view these as emergency measures, that once the economy starts to recover we have to re-think, because there are other developments that are taking place in the global economy,” she explained.

“Value chains have been disrupted but they are re-structuring and re-organizing and coming back in more compact forms.

“China will be at the forefront of some of these value chain networks in the Asian region.

“And Sri Lanka cannot afford to miss-out by holding onto unwieldy tariff regimes and other protectionist measures in key sectors that we want to ensure that we break into international markets.

“If you want to join the global production structures you need a seamless tariff regime for raw materials and intermediate goods.”

Weerakoon said Sri Lanka should also be cautious about state spending for ‘stimulus’ as there was a ‘debt overhang’ and the country had to repay foreign debt. Therefore some kind of credible fiscal policy was needed.

Sri Lanka’s sovereign bonds are trading at steep discounts which is making it difficult to roll-over them at the moment and forcing the government to make bullet repayments.

Sri Lanka however has controlled the spread of Coronavirus allowing people to actually go out and work, which is a real not financial ‘stimulus’ analysts say. Colombo/Oct19/2020)

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IMF official: Sri Lanka’s road ahead is challenging, critical to keep up with reform momentum

ECONOMYNEXT –International Monetary Fund’s First Deputy Managing Director Gita Gopinath said Sri Lanka’s future with many reforms are challenging, but it is critical to keep up with the reform momentum.

Gopinath stated this after meeting the island nation’s State Finance Minister Shehan Semasinghe Central Bank Governor Nandalal Weerasinghe, and Treasury Secretary Mahinda Siriwardena on the sideline of the IMF/World Bank Spring Meetings in Washington.

“I commended them on hard-won economic gains in the past year. The road ahead is challenging and it’s critical to keep up with the reform momentum,” Gopinath wrote on her X platform.

Under IMF programme, President Ranil Wickremesinghe has implemented a raft of hard reforms including higher taxes.

Sri Lanka agreed to the IMF programme after it declared bankruptcy with sovereign debt default in April 2022.

Semasinghe after the meeting tanks Gopinath for acknowledging Sri Lanka’s economic progress.

“Our discussion was insightful and productive, and we appreciate the opportunity to delve into the challenges and opportunities ahead,” the State Finance minister said in his X platform.

“We remain steadfast in our commitment to our reform agenda and eagerly anticipate continued collaboration with the IMF to advance our shared goals.”

Sri Lanka was compelled to go for IMF after the unprecedented economic crisis which was followed by a political crisis that ousted former president Gotabaya Rajapaksa and his government who were legitimately elected.

The IMF programme has included reforms in state-owned enterprises, fiscal sector and financial sectors to ensure debt sustainability.

The global lender also has pledged its support to speed up the island nation’s lingering debt restructuring process with private creditors including sovereign bond holders. (Colombo/April 22/2021)

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Sri Lanka motor racing crash claims 7 lives, 4 critical

ECONOMYNEXT – A deadly accident at motor Race Sri Lanka’s hill country town of Diyathalawa has claimed at least 7 lives police said, after a racing vehicle, in the seasonal Fox Hill Super Cross ploughed in to spectators after running off the track.

Another 21 spectators were injured Sunday, and hospitalized and at least four were critical, police said.

Thousands of people come to watch the Fox Hill Super Cross race, which is usually held in April, as large numbers of people head to the cooler climes in the hills.

According to footage taken by spectators one car overturned on the side of the track.

Sri Lanka’s Newsfirst television said Marshalls were waving flags to caution other vehicles, when another car went off the track and crashed into spectators. (Colombo/April21/2024)

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Widespread support for Sri Lanka debt workout, reform progress at IMF/WB meet: Minister

ECONOMYNEXT – There was widespread support for Sri Lanka’s debt restructuring and acknowledgement of progress made under an International Monetary Fund program, at meeting of the fund and World Bank, State Minister for Finance Shehan Semasinghe said.

“The strides made in our economic recovery and financial stability have been acknowledged as significant advancements towards our country’s prosperity by our stakeholders and international partners,” Minister Semasinghe said in an x.com (twitter) post after attending the meetings.

“Further, it was heartening to note the widespread appreciation and support for Sri Lanka’s debt restructuring process.

“We remain steadfast in our commitment to reaching the restructuring targets and confident of smooth progress in the continued good-faith engagements for a speedy debt resolution that will ensure debt sustainability and comparability of debt treatment.”

Sri Lanka ended a first round of talks with sovereign bondholders in March without striking a deal but some agreement on the basis for a deal.

An initial deal with bilateral creditors have been reached, but they may be awaiting a deal with private creditors to sign formal agreements.

International partners have appreciated reforms made under President Ranil Wickremesinghe, Minister Semasinghe said.

“It was great to engage in productive bilateral discussions with all of whom appreciated the recent economic developments, progress in debt restructuring, strengthening of tax administration, and ongoing governance reforms,” he said.

Sri Lanka’s rupee has been allowed to re-appreciate by the central bank amid deflationary monetary policy, bringing tangible benefits to people in the form of lower energy and food prices, unlike in past IMF programs.

Electricity prices were cut as a strengthening currency helped reduce the cost of coal imports.

Related Sri Lanka central bank mainly responsible for electricity price cut

The currency appreciation has also allowed losses to the Employment Provident Fund imposed to be partially recouped, helping old workers near retirement, as well as raising disposable incomes of current wage earners on fixed salaries.

Related Sri Lanka EPF gets US$1.85bn in value back as central bank strengthens rupee

The IMF, which was set up after World War II to end devaluations seen in the 1930s after the Fed’s policy rate infected other key central banks, started to actively encourage depreciation after a change to its founding articles in 1978 (the Second Amendment).

The usefulness of money as a store of value, or a denominator of current and future values then decline, leading to loss of real savings, real wages and increases in social unrest.

Before that, members who devalued more than 10 percent after printing money for growth or any other reason, faced the threat of suspension from the organization as punishment.

Sri Lanka’s rupee has appreciated to around 300 to the US dollar now from 370 after a surrender rule was lifted in March 2023.

But there is no transparency on the basis that economic bureaucrats are allowing the currency to gain against the US dollar (the intervention currency of the central bank).

The rupee is currently under pressure, despite broadly prudent monetary policy, due to an ‘oversold position’ in the market after recent appreciation made importers and banks to run negative open positions as the usefulness of the currency as a denominator of future value declined with sudden strenghtening. (Colombo/Apr21/2024)

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