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Sri Lanka task force to devise post-Covid-19 ‘new economic model’

ECONOMYNEXT – A presidential task force has been asked to a come up with a ‘new economic model’ in the post-Coronavirus era, with economic plans for different areas and specified targets, the President’s office said.

These included plans to stop the ‘foreign exchange outflow’ from education, the use of indigenous medicine as well as developing tourism and bringing in more foreign investment.

“President directed that the Task Force should prepare economic plans with specified targets in different areas that come under its purview and implement them,” his office said.

“Apparel and tourism sectors which make a huge contribution to the national economy should be revitalized to suit the changing situations.”

President Rajapaksa had said there could be new opportunities in tourism from countries where Coroanvirus goes down.

There could be opportunities for drawing tourists who stay longer and also high end travellers. He had also asked officials to draw more foreign investment into Port City and Hambantota Industrial Zone instead of getting more debt.
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Sri Lanka is planning to relax curfews and get economic activities up and running from May 11.

Sri Lanka has aggressively contact traced Coronavirus cases, tightened border controls like South Korea and Vietnam keeping down the spread of the disease, ahead of many other countries in the world.

Sri Lanka has also been gradually relaxing controls and many industries are already operating.

Moves towards a more economic planning in Sri Lanka contrasts with the countries like Vietnam and South Korea which also aggressively contact-traced and are rapidly moving towards a normal life allowing markets to work.

Planned Economy

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Some recent state interventions in Sri Lanka which prevented the economy from rapidly adapting to the changing market needs have been removed.

Sri Lanka’s National Medical Regulatory Authority, slapped price controls and export bans in planned economy style moves, blocking Sri Lanka’s hard hit apparel exporters from making personal protective equipment for domestic or exports markets.

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When price controls are placed, domestic producers or even importers are unable to keep supplies up as both raw material and transport costs shot up.

But the controls and export bans have been removed freeing the factories to move into mask production.

Meanwhile the central bank also injected excess money into money market and cut rates in a ‘monetary stimulus’, triggering foreign exchange shortages, and worsening capital flight, requiring more controlled era-style moves including exchange and import controls to stop the rupee from falling.

The central bank also intervened in forex markets after the rupee fell close to 200 to the US dollar. When excess rupees are printed, unless interventions are made at the loss of forex reserves, currency pegs break.
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The rupee has now gained towards 189 with domestic consumption falling and economic activity slowing.

There have been calls to reform central bank operations to stop frequent ‘foreign exchange shortages’ and currency collapses, so that people and businesses can forget about ‘saving foreign exchange’, controlling imports, and get on with their lives like in other countries with monetary stability.

The International Monetary Fund warned in late April that a country which does not have an internationalized currency (either a fully floating rate or a hard peg) will face foreign exchange problems if they engage in ‘monetary stimulus’ (rate cuts and liquidity injections) and will have to impose exchange controls.

“So, when they actually rely on large stimulus packages, they have to worry about its possible negative impact on their external sector especially the FX market,” Rhee said.

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Sri Lanka exporters and domestic industries have also been hit by the import controls and have asked for relief from the controls. (Colombo/May08/2020)