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Sri Lanka, India growth downgraded by IMF; Bhutan, Nepal up

ECONOMYNEXT – Sri Lanka’s economic growth for 2019 has been cut to 2.7 percent by the International Monetary Fund, down 0.8 percent from a earlier projection in April, while India’s growth has been cut by 1.2 percent to 6.1 percent.

Growth for Bhutan and Nepal, countries which do not have central banks that print money for ‘active monetary policy’ have been upgraded, from the April projection.

The IMF painted a gloomy external picture for Asian economies amid a US-China trade war.

“A marked deceleration in merchandise trade and investment, driven by distortionary trade measures and an uncertain policy environment, is weighing on activity, particularly in the manufacturing sector,” the IMF said in its Asia Pacific Regional Economic Outlook released Wednesday

“Loosening monetary policy in key advanced economies and, correspondingly, easing financial conditions, are mitigating the impact of slower growth on Asian economies, but could add to financial vulnerabilities in the region.

“External downside risks to the outlook stem from a possible further deepening of US-China trade tensions, weaker-than-expected growth of key trading partners, higher oil prices, and a disorderly Brexit.”

Growth projections are generally lower for countries with central banks that print money to engage in active monetary policy.

Both Sri Lanka and India faced monetary instability in the second half of 2018, while the respective central banks juggled with dual external and domestic anchors triggering currency collapses and liquidity shortages in the credit system.

Both countries are seeing a spike in bad loans and an import collapse in 2019. India’s non-bank lenders in particular have seen their troubles intensify after the 2018 bout of monetary instability.

India’s import collapse has also hit Sri Lanka’s ports amid a general slowdown in global trade that has also moderated exports.

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Exports of most Asian nations have slowed sharply.

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Sri Lanka was also hit by a Islamist suicide bombs in April which has hit tourism and domestic demand, on top of the negative effects of monetary instability.

Bangladesh, whose central bank has not experienced severe balance of payments trouble for almost a decade, was projected to grow at 7.8 percent in 2019, up 0.5 percent and 7.4 percent in 2020.

However the Taka has been allowed to depreciate steadily of late.

The IMF upgraded growth for Nepal, 0.6 percent to 7.1 percent. Growth for 2020 is projected at 6.3 percent. Nepal Rastra bank does not have active monetary policy and has maintained a parity of about 1.6 to the Indian rupee for decades.

Growth in for Bhutan another South Asian nation which has an almost a currency-board-like monetary authority was also upgraded by 0.7 percent to 5.5 percent. Bhutan’s growth for 2020 has been upgraded 0.9 percent to 7.2 percent.

The Royal Monetary Authority of Bhutan has maintained a 1 to 1 parity with the Indian rupee for decades.

However the Indian rupee has depreciated against the US dollar, dragging Bhutan and Nepal down with it.

Most South Indian currencies including Sri Lanka had a 1 to 1 parity with the Indian rupee at independence and the Indian rupee was around 4.70 to the US dollar.

Growth in Maldives, which has had sporadic active monetary policy and currency falls, was upgraded by 0.2 percent to 6.5 percent for 2019 and by 0.5 percent to 6.5 percent.

The generally stable currency peg of the Maldives Monetary Authority, with minimal active policy, has allowed the islands to have one of the freest trade regimes of the region.

The Maldives Rufiyaa is pegged to a better central bank, the US Fed. Per capita gross domestic product of the Maldives was about 10,400 US dollars in 2018.

Monetary stability (sound money) is one of the necessary foundations for growth and prosperity, debt repayment and capital conservation for investment according to classical economistss

“Stability is not everything,” Karl Schiller, economist and one-time Economy Minister of West Germany, a country that refused to practice Keynesian interventionist policies, said. “But without stability, everything is nothing.” (Colombo/Oct23/2019)

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