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Saturday October 23rd, 2021

Sri Lanka says IMF growth projection for 2021 too low

SUDDEN STOP: Sri Lanka and the Maldives have high levels of foreign debt partly due to Chinese infrastructure lending. Both countries have also been subject to IMF fiscal tinkering. In the case of Maldives it is a shift to highly volatile income tax from stable indirect tax.

ECONOMYNEXT – Sri Lanka says a 3.6 percent growth projection for 2021 by the International Monetary Fund is too low and the country will grow at 5.0 percent as expected as the island recovers from a Coronavirus pandemic with high vaccination.

The IMF downgraded the island nation’s economic growth to 3.6 percent in its latest economic outlook release on Tuesday (12) from an earlier 4.0 percent, while global growth was also lowered slightly.

Central Bank governor Ajith Nivard Cabraal said he would rely on local experts to predict Sri Lanka economic growth rather than the IMF.

“Global forecast is more general in nature,” Cabraal told reporters after keeping policy rates at 6.0 percent at an October rate decision.

“But when it comes to the local forecast, I think our research department has a greater understanding about the Sri Lanka economy than the people who have been manning the desk at the IMF as far as Sri Lanka is concerned.”

The global economy is expected to grow at 5.9 percent this year and 4.9 percent next year while the global lender predicts 6.4 percent growth for 2021 and 5.1 percent for next year for emerging markets and developing economies.

Analysts say IMF predictions have been usually conservative and include some global risks that could have impacts on individual countries.

“I would rather take the word of our experts who have greater access to the information rather than rely on those numbers that the IMF would do,” he said.

“But the IMF’s global numbers could be the numbers we rely on as far as the global economy is concerned.”

Sri Lanka, which is facing risks of possible sovereign default, is under pressure as it is unable to access the global capital market after ratings agencies have downgraded it to CCC, barely above default.

A sovereign default and ‘sudden stop’ of external financing could contract the economy, the World Bank has said. Sri Lanka and the Maldives were most at risk in South Asia.

The Maldives Monetary Authority however has the best record at an absolute level on monetary instability, while Bhutan and Nepal, which are pegged to the Reserve Bank of India, which has sub-optimal policy.


IMF cautions Maldives on money printing to stop rufiyaa fall as Sri Lanka wobbles

Sri Lanka is in the midst of a currency crisis, after its monopoly note-issue bank, printing large volumes of money to de-stabilize the external sector heightening the possibility of external sovereign default as foreign exchange shortages persist.

Governor Cabraal has lifted price controls on bond auctions which were triggering money printing and forex shortages, bringing default closer, though he is facing an uphill struggle in getting debt and forex markets to work.

Sri Lanka’s central bank, set up in the lines of Argentina’s central bank has created external trouble and created volatile growth, high inflation, currency crises and social unrest for 70 years critics have said.

The agency has gone 16 times to the IMF after mis-managing its balance sheet mis-using multiple contradictory provisions in its constitution which allows its governing body to undermine its own mandate of economic and price stability, critics say.

It has also been buying bonds into its balance sheet after unceremoniously jettisoning a ‘bills only’ policy set by classical economists is probably violating section 112 of its constitution.

Purchasing maturing bonds allows the agency to monetize past deficits.

A Latin American central bank typically triggers a currency crisis by failing to roll-over its own securities at market rates, a device first invented by Argentina central bank creator Raoul Prebisch, which has devastated his country multiple times, despite having relative good budgets.

Spending for Prosperity

Sri Lanka is facing sovereign default due to forex shortages created by the central bank in the course of printing money to fill a budget gap created from extraordinary tax cut December 2019 followed by an expansion of the state by hiring 53,000 unemployed graduates.

The administration is also building ‘multi-task force’ from unskilled workers churned out by the other extreme of the state education system to ‘reduce poverty’.

Sri Lanka’s state spending rose sharply from 17 percent in 2014 to around 20 percent as part of a reckless ‘revenue based fiscal consolidation’ exercise that favoured the political classes against productive tax payers and spurned spending based consolidation, critics have said.

Related Rupee, Sri Lanka, in trouble after Keynesian stimulus

“In 2015, when we built the government, there was a collapse in aggregate demand,” Prime Minister Wickremesinghe told parliament in 2016 as the rupee collapsed around him from call money rate targeting.

“In this way we put more money in the hands of consumers to increase aggregate demand.”

Private citizens, including three wheeler drivers, news-paper and bread delivery persons who use highly taxed petrol, therefore had to take the entire burden of fiscal corrections and unemployed graduate hires.

Classical economists have called such anti-state-austerity moves ‘statistical’ methods of budget balancing exercises which are out of touch with Keynesian influenced political and Mercantilist realities involving heedless spending for growth.

“Another statistical alternative of balancing the Budget is to step up Revenue
collections…,” economist B R Shenoy said in 1966.

“This alternative is beset with pitfalls. Past experience in Ceylon, which is in line with experience in virtually all parts of the world, is that in a democratic set up political and other pressures are heavily on the side of more and more spending by the government.

“When Revenues increase, under the weight of these pressures, expenditures too increase to meet, or even exceed, Revenue collections.”

The current administration has outdone Wickremesinghe and cut taxes for ‘stimulus’ in December 2019.

Sri Lanka however is trying its best to avoid a default or impose hair-cuts on commercial lenders and preserve its clear record in foreign debt.

Though forecasts may vary, the IMF usually takes the numbers produced by domestic agencies without demur including for budget numbers, even when sharp deviations from past practices are clearly apparent. (Colombo/Oct14/2021)

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