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Tuesday April 16th, 2024

Sri Lanka’s economic crisis and COVID-19 pandemic reverses progress in SDGs – IPS

ECONOMYNEXT – Sri Lanka’s economic crisis and the effects of COVID-19 pandemic has made it difficult to finance Sustainable Development Goals reversing the progress the country made, a report said.

IPS said COVID-19 has reversed the progress particularly on poverty, inequality, and decent work.

“Financing SDGs has become the biggest challenge for Sri Lanka, becoming even tighter following Sri Lanka’s inability to access international bond markets after the sovereign default in April 2022,” a report by Institute of Policy Studies based in Colombo said.

“Given the enormous challenges to achieving the SDGs, those related to poverty and inequality; food security; economic growth and decent work; health and education; and energy must be prioritised.”

Full statement reproduced below:

Sri Lanka and the SDGs: Impacts of COVID-19 and the Economic Crisis
From IPS’ flagship publication, ‘Sri Lanka: State of the Economy 2022’

• COVID-19 reversed Sri Lanka’s progress across several SDGs, particularly on poverty, inequality, and decent work.
• Similarly, the economic crisis is likely to adversely affect the SDG progress and pose several new challenges to their achievement by 2030.
• Financing SDGs has become the biggest challenge for Sri Lanka, becoming even tighter following Sri Lanka’s inability to access international bond markets after the sovereign default in April 2022.
• Given the enormous challenges to achieving the SDGs, those related to poverty and inequality; food security; economic growth and decent work; health and education; and energy must be prioritised.
• Resource mobilisation to secure both traditional and non-traditional SDG financing, including attracting private investments to SDGs, is vital.

Since adopting the 2030 Agenda for Sustainable Development in 2015, successive Sri Lankan governments have taken measures to achieve the 17 Sustainable Development Goals (SDGs) and 169 targets. Before COVID-19 struck, Sri Lanka recorded progress across several SDG targets, most notably: ending poverty and hunger (SDGs 1 and 2); improving access to health and education (SDGs 3 and 4); promoting gender equality and decent work, and reducing inequalities (SDGs 5, 8 and 10). The pandemic, however, reversed these advances, particularly on the SDGs related to poverty, inequality, and decent work. Similarly, the economic crisis is likely to adversely affect the SDG progress and pose several new challenges to their achievement by 2030. Against this backdrop, this Policy Insight discusses the impacts of the pandemic and the implications of the current financial crisis on SDGs in Sri Lanka, paying special attention to the SDGs related to poverty and inequality.

Impacts of COVID-19 and the Economic Crisis

The COVID-19 pandemic has impacted many of the 17 SDGs, with some goals including SDG 1 on poverty backsliding the progress made over the past decade. As with other countries, Sri Lanka also reported notable adverse effects of the pandemic on the lives and livelihoods of its population, especially the poor and the vulnerable. While the pandemic has impacted many SDGs, and all three dimensions of sustainable development – economic, social, and environmental – the adverse effects on some SDGs, especially those related to poverty, food security, health, education and employment are more prominent.

Despite the setbacks during the pandemic (2020-2021), Sri Lanka has improved its overall SDG performance since 2016, as indicated by the SDG Index. As per the Sustainable Development Report 2022, Sri Lanka, with an SDG Index of 70, is ranked 76 among 163 countries. This is close to the overall SDG performance of Malaysia (SDG Index of 70.4) and ahead of countries like the Philippines, India, Bangladesh and Indonesia (see Figure 1). Moreover, the SDG Index for Sri Lanka is only slightly lower than the average for upper-middle countries (71.5%) and considerably higher than the average for lower-middle-income countries (61.8%), as well as the East and South Asian average (65.9%).

Figure 1

However, the progress of individual SDGs indicates major challenges to achieving several SDGs, including SDG 2 (zero hunger), SDG 3 (health), SDG 6 (water and sanitation), SDG 7 (energy) and SDG 9 (industry, innovation, and infrastructure), despite their moderate performance. Furthermore, SDG 8 on decent work and SDG 5 on gender equity and SDGs 15-17 have been stagnant in their progress, indicating significant challenges to achieve them by 2030. Only a few SDGs, such as those on education (SDG 4) and climate change (SDG 13), are shown to be still on track to achieve the goals on time. Nevertheless, Sri Lanka’s economic crisis will adversely affect the SDG progress and pose several new challenges to their achievement by 2030.

A combination of many factors caused the economic crisis, including the lack of foreign reserves, disruptions to the tourism industry starting from the Easter Sunday attacks in 2019 and the pandemic in 2020, tax cuts that resulted in a significant decline in government revenue and rising crude oil prices partly related to the Russia-Ukraine War and associated sanctions. While the economic crisis has affected the country’s entire population in some way or another, the poor and the ‘near poor’ are the most hit by the crisis. With high inflation, shortage of food and other essentials, and loss of livelihoods, the economic crisis is likely to reverse progress on the SDGs.

Poverty and Inequality
A World Bank study estimates that 500,000 people have fallen into poverty due to the pandemic. This has led to an increase in the USD 3.20 poverty rate from 9.2% in 2019 to 11.7% in 2020, implying a reversal in progress made towards poverty reduction in Sri Lanka since 2016. The study further finds that the extreme poverty level nearly doubled in 2020 from its 2019 levels (from 0.7% to 1.2%), and the poverty gap too has increased, indicating that the poor have become even poorer due to the pandemic. The study stresses the impact on employment such as job losses and a fall in earnings as the main contributory factors to the increased poverty rates.

Further, the World Bank’s Macro Poverty Outlook for Sri Lanka (2022) estimates poverty levels to have fallen slightly in 2021 from their 2020 level, but the forecast remains above the 2019 level for the next few years. However, the current economic crisis, especially soaring prices of food, fuel and other essential goods, along with adverse impacts on the livelihoods of many workers – particularly, the informal sector workers – means the risks of higher poverty are high. The poverty level can be expected to rise further in 2022, reversing the much-achieved progress in poverty reduction seen over the years.

Financing SDGs is Key Challenge

Financing SDGs has become the biggest challenge for Sri Lanka. On the domestic front, government expenses increased with the pandemic while revenues plummeted, primarily due to tax cuts introduced in 2019. On the external front, foreign income earnings from remittances and tourism dropped. Economic shocks such as the Russia-Ukraine crisis continue to disrupt the global economy, worsening the global macroeconomic climate. Other inflows, such as FDI into the country, have also reduced post-COVID-19 as the economic uncertainties have mounted. Financing has become even tighter following Sri Lanka’s inability to access international bond markets after the selective default of foreign debt payments in April 2022. All these issues have widened the financing gap to achieve SDGs.

Conclusions and Policy Implications

Given the complexity of SDGs and the enormous challenges to achieving them, it is desirable to prioritise the targets that are deemed most important. Prioritisation must be based on the country’s development needs and trade-offs between the targets. Given the enormous financial constraints and adverse implications of the economic crisis, it would be essential to prioritise SDGs related to poverty and inequality (SDG 1 and 10), food security (SDG 2), economic growth and decent work (SDG 8), health (SDG 3) education (SDG 3) and energy (SDG7). While various goal-specific measures are required to accelerate the progress of SDGs, some key steps are:

Securing Financing
Sri Lanka needs to prioritise resource mobilisation for traditional and non-traditional SDG financing.

Traditional SDG Financing: Domestic resource mobilisation is essential if Sri Lanka is to progress on SDGs. Generally, traditional SDG financing includes government financing and ODA from foreign governments. In Sri Lanka’s case, ODA has also been on a declining trend as it moved up the income ladder, while foreign aid now rightly focuses on covering the essential needs of the people first (e.g. food security, social protection, healthcare, power/fuel). In the medium term, however, there needs to be more emphasis on financing other SDGs, especially those related to education, employment, industry, innovation, and infrastructure. Attracting private investment to SDGs, too, will be vital.

Non-traditional SDG Financing: The Roadmap for Sustainable Finance in Sri Lanka, developed by the Central Bank of Sri Lanka (CBSL), highlights some non-traditional instruments in SDG financing. These include green bonds specific to development projects based on environmental protection and climate change. Capital markets have recently become a driving force towards a sustainable future. Sri Lankan companies can explore the Environmental, Social and Governance (ESG) bonds market. However, green bonds and ESG financing focus on the environment. Sri Lanka needs to expand spending on critical areas such as poverty alleviation (SDG 1), food security (SDG 2) and healthcare (SDG 3). Strengthening multilateral and bilateral partnerships would be crucial, particularly given the lack of fiscal space.

Strengthening Partnerships
Multistakeholder engagement – including government agencies, the private sector, and civil society organisations – is key to achieving SDGs and ensuring an inclusive process. Moreover, enhancing regional and global partnerships to mobilise and share knowledge, expertise, technology, and financial resources is crucial to supporting the achievement of SDGs.

South-South cooperation is also an avenue that needs to be further explored by Sri Lanka. Regional cooperation can help accelerate the progress of several SDGs, in particular, SDGs related to food security (SDG 2), health (SDG 3), energy (SDG 7), decent work (SDG 8) and climate action (SDG 13).

Addressing Data Deficits
While Sri Lanka has made much progress in terms of liaising with the relevant agencies to compile the required data, the lack of more up-to-date data at regular intervals (e.g. annual basis) and lack of disaggregated data (by gender, location, age, etc.) for many SDGs is a significant drawback for monitoring. Given these data gaps, improving the availability of high-quality, timely, reliable, and appropriately disaggregated data for SDGs is important. This requires enhancing the capacity of relevant agencies as well as strengthening partnerships among various stakeholders. There is also some scope for enhancing regional cooperation to improve statistical capacity in Sri Lanka and share knowledge and experience among these countries.

*This Policy Insight is based on the comprehensive chapter “Crises and Recovery: Meeting the 2030 Agenda on SDGs” in the ‘Sri Lanka: State of the Economy 2022’ report – the annual flagship publication of the Institute of Policy Studies of Sri Lanka (IPS). The complete report can be purchased from the Publications Unit of IPS located at 100/20, Independence Avenue, Colombo 07 and leading bookshops island-wide. For more information, contact 011-2143107 / 077-3737717 or email: publications@ips.lk.
To download more POLICY INSIGHTS from IPS, visit: https://www.ips.lk/publications/policy-insights.

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Sri Lanka could get hit from a disorderly US tumble

ECONOMYNEXT – Sri Lanka is recovering fast but the country could get hit from an unravelling of advanced economies, particularly the United States, which is skating on very thin ice, after exceptionally bad monetary policy, which has destroyed fiscal metrics as well.

The US was running bad to atrocious monetary policy since 2001, when Ben Bernanke misled Alan Greenspan into printing money to run an 8-year cycle, firing a commodity and housing bubble which collapsed after rates were kept at around 5 percent for about a year.

That was the end of the Great Moderation started by Paul Volcker and continued with some skill under Greenspan, until the Fed was infected by Bernanke, the depression scholar. Keynes was also a ‘depression scholar’, in essence.

Gold prices fell from 800 to 284 dollars an ounce under Volcker-Bernanke, until Bernanke cooked up a false deflation scare with a healthy banking system and started to reverse it, firing the housing bubble and the Great Recession in its wake.

Then came quantity easing after the banking collapse and Frank-Dodd to control banks.

From around Covid and until March 2022, quantity easing resumed no holds-barred with fiscal policy also deteriorating as the government used the money.

It is now almost a year since interest rates have been at 5 percent in the US after Powell started to raise rates.

But this is not the US of 1980 or 2000, and it not just some companies but the government is chocked to the gills in debt after the MMT style stimulus and Covid handouts and perhaps the most aggressive ‘full employment’ policies in the history of the Fed.

Warning Signs

F A Hayek said this of Keynesianism and the policy rate to boost growth through full employment policies (now called targeting potential output in Sri Lanka).

“It was John Maynard Keynes, a man of great intellect but limited knowledge of economic theory, who ultimately succeeded in rehabilitating a view long the preserve of cranks with whom he openly sympathized.”

In continuing with quantitative easing with a healthy banking system, the Fed and the ECB is putting Keynes and John Law to shame.

It was perhaps no accident that the IMF taught Sri Lanka to calculate potential output a few years ago, with this ideology running high in Washington, eventually taking both the Yahapalana and Gotabaya Administration down and driving Sri Lanka to default.

There was an unprecedented overall deterioration of policy around the world that spread from the Fed and US universities, just like in did in the 1920s when the policy rate and deliberate open market operations were invented and the 1960s when its own anchor was busted .

From last year the US broad money supply has been shrinking in absolute terms, something that has rarely happened.

The Fed no longer looks at money supply, under their current framework.

Economist Steve Hanke, who was ad advisor to the Reagan Administration when the landmark action was taken to bring monetary stability back in the early 1980s, and kick-start non-inflationary growth, has pointed out that absolute falls in the money supply is very rare in the US.

Hanke also accurately predicted the 2022 inflation spike from Fed’s inflationism.

Bad Money, Bad Budgets

US budgets are shot.

After years of bad Fed monetary policy (which also helped Sri Lanka borrow in dollars from sovereign bond holders and China), US rates are going up and interest costs are rocketing like in Sri Lanka.

Is it possible for a US Treasuries auction to fail?

In theory no, since the Fed can buy it up as Sri Lanka’s central bank does to cut rates and trigger external crises.

But any such event can send bad vibes which can be the proverbial straw that broke the camel’s back.

The US Treasury had almost a perfect system going until around 2000, with the China and East Asia buying up US debt and importing the stability of the Great Moderation to become investment and export powerhouses.

But US Mercantilists who believe that exchange rate pegs made East Asia export powerhouses, at the expense of the US trade deficit, put pressure on China and other countries to break the peg, losing a big buyer of their debt.

IMF backed Self Destruction

The IMF fully supported these efforts.

China then broke the peg from around 2005 and diverted savings to the Belt and Road project.

When the housing bubble broke, China was in pretty good shape with tighter than US policy until then.

After quantity easing started US rates were low in any case. Sri Lanka was one of the countries that the money was diverted to.

Bond holders, also awash in liquidity started to buy crappy bonds from low rated countries which are now defaulting like dominoes.

The Fed, by triggering commodity bubbles and oil prices that tends to incentivize leaders of illiberal mineral rich countries into war, Arab Israeli wars or Russian aggression.

US dealt itself another blow during the Ukraine crisis.

The lack of knowledge in US policy circles was clearly shown by the freezing Bank of Russia reserves invested in the US.

It prevented Russia’s central bank from using reserves to mis-target rates and sterilizing the interventions with printed money, and helped Russia avoid a monetary meltdown.

Instead of printing money to mis-target rates after intervening to trigger a currency crises like repeated IMF backed countries and Latin America does, Bank of Russia hiked rates to 20 percent virtually the day after reserves were frozen and clean floated.

As a result, the US budget has lost another customer for its bonds. More to the point it has discouraged others from buying US bonds as well. If reserves are frozen, then countries which have bad relations with the US will no longer buy US bonds.

Clean floating countries will not collect reserves in any case.

The steeply rising gold prices now, are partly driven by central bank purchases, who would perhaps have bought more US bonds in the past. If more countries are driven to external crises though flexible inflation targeting, they will also sell US bonds.

The IMF has has started peddling flexible inflation targeting to Vietnam.

In the last Article IV consultation, the IMF also promoted expansionary fiscal policy dealing a death blow the central bank efforts to stabilize the external sector by replacing private credit with government credit.

Curiouser and Curiouser

There is another curious phenomenon seen in Fed statistics that should make people sit up and take notice.

The reserve balances component of the US monetary base (there is no longer a required reserve rule in the US amid the latest deterioration of its monetary framework) is climbing even as the Fed is engaged in quantity tightening.

This is clear liquidity preference behaviour, where the smart banks are getting ready for the worst instead of – say – buying government treasuries.

Sri Lanka saw a similar situation among the best managed foreign banks in Sri Lanka during the country’s ‘mother of all currency crises’.

Fed wants to quantity tighten, but banks are building up liquidity. Essentially the effect on the economy is the same – some banks are not lending. The difference is these banks may be smarter.

There seems to be two types of banks, which are acting in completely different ways in the US.

While some banks seem to be loading up on liquidity others are lending – at 5 percent plus.

Commercial bank credit which stopped growing and fell from the time the Fed started to tighten policy in March 2022 (a very quick response) has started to edge up over the past few months.

It is not clear who is taking the loans, at 5 percent plus which is a very high rate for a highly leveraged economy like the US. At least some of it must be going for commodity speculation.

Meanwhile gold has hit 2,400 dollars an ounce. Gold was only 284 dollars an ounce when Bernanke induced Greenspan to print money for positive inflation targeting by falsely firing a deflation scare in 2000.

There was some expectations by various technical analysts that gold will hit 2,400 an ounce. So, it can be a self-full filling prophecy.

Whatever it is, a commodity bubble at the tail end of a rate hiking cycle is not a good omen. A similar trend was seen just before the collapse of the housing bubble. It is like the dead cat bounce of the commodity world.

Soft-Landing or Disorderly Unravelling of the Powell Bubble?

In the Greenspan-Bernanke bubble it was HSBC’s housing unit in the US that showed that the system was rotten.

The jitters over the Iranian attacks show that US markets are skating on very thin ice.

It is not clear to what extent US companies are over-leveraged.  It was mostly a housing bubble that broke in 2008. But this time credit has shifted to other sector.

Government debt is one. The recent bank failures related to marked-to-market long-term government bonds confounding those who promote full reserve banking.

But there are signs that some other companies, including those in infrastructure which tended to be pretty safe, have borrowed and engaged in activities like leveraged dividend recapitalizations.

Over recent years there had been a spate of leveraged dividend recaps.

Jerome Powell said last week that the Fed will continue to tighten with inflation still high.

“The recent data do not, however, materially change the overall picture, which continues to be one of solid growth, a strong but rebalancing labor market, and inflation moving down toward 2 percent on a sometimes bumpy path,” he said.

“Labor market rebalancing is evident in data on quits, job openings, surveys of employers and workers, and the continued gradual decline in wage growth. On inflation, it is too soon to say whether the recent readings represent more than just a bump.

“We do not expect that it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down toward 2 percent. Given the strength of the economy and progress on inflation so far, we have time to let the incoming data guide our decisions on policy.”

Under the Fed’s (historical) data driven monetary policy and its dual mandate (which by the way was generally ignored by both Volcker and Greenspan in favour of stability) there is no chance to cut rates, so he is justified in the stance.

But it does not necessarily mean that the historical data he is looking at will lead to a soft-landing or another deflationary collapse.

This time, the US government will have less room than in the past to engage in various macro-economic policies to manipulate the economy given its debt and the political crisis in Washington.

The banking system may also not respond to Fed actions as it had done in the past.

In earlier collapses, gold, dollar notes and US government debt were investments of choice for economic agents, as shown in Exter’s pyramid.

The US so-called ‘weaponizing’ of the dollar has reduced its attractiveness overseas, but not necessarily at home as shown by the recent liquidity preference behaviour.

Sri Lanka hit by bad US policy in the past

In past US monetary crises, whether the Great Depression, the 1960s inflationism (Sri Lanka first started its journeys to the IMF in the middle of that decade and passed the import control act), the 1971 collapse of the Bretton Woods (Sri Lanka closed the economy), the country has been hit.

In 1980s when US improved policy Sri Lanka failed to capitalize on it unlike dollar pegged East Asia.

From 1978, at the tail end of the Great Inflation period, Sri Lanka lost a credible anchor leading to high inflation and social unrest and missed stability that East Asia got by maintaining external anchors with the Fed improving its policy.

The US and the US dollar survived in 1951 and 1980 as hard money people got back into the driving seat and inflationist macro-economists lost favour.

However it did not happen in 2008. Things essentially got worse as it did in the 1930s with quantity easing infecting even once prudent reserve currency central banks, as Keynesianism and the policy rate did after the Great Depression, leading to mass devaluations in the 1930s.

It may be time to look for countermeasures. Sri Lanka at the moment is fixing its budgets and has reasonable monetary policy though the operational framework is deeply flawed. Companies and individuals may also need to hedge their bets.

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IMF urged Sri Lanka to preserve “hard earned gains” after economic crisis: State FinMin

ECONOMYNEXT – The International Monetary Fund has urged Sri Lanka to preserve the hard earned gains after an unprecedented economic crisis under the global lender’s programme, State Finance Minister Shehan Semasinghe said.

The Sri Lankan delegation led by Shehan Semasinghe met Kenji Okamura, the Deputy Managjng Director of the IMF on the first day of the IMF and  World Bank Spring meeting.

“Mr. Okamura commended the Sri Lankan authorities on strong programme implementation and excellent reform progress. He emphasised the need to preserve the hard earned gains Sri Lanka has experienced since the beginning of the IMF programme and continue strong ownership,” the State Minister said in his X (Twitter) platform.

He said the Sri Lankan delegation including Central Bank Governor Nandalal Weerasinghe and Secretary to the Treasury Mahinda Siriwardana explained the recent socio-economic developments to Okamura.

He also affirmed the IMF top official on the authorities’ commitment to ensuring continuity and consistency of macroeconomic policies and reforms undertaken under the programme. (Colombo/April 16/2024)

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Sri Lanka State FinMin meets BCIU in US; discusses post-crisis investment prospects 

ECONOMYNEXT – Sri Lanka’s State Finance Minister Shehan Semasinghe met Business Council for International Understanding( BCIU) in Washington on the sideline of the IMF/World Bank Spring Meetings late on Monday and discussed investment prospects in the island nation which is gradually recovering from an unprecedented economic crisis.
“Our discussion centered on the potential that Sri Lanka offers for international investors. Explored various sectors, including education, tourism, renewable energy, agriculture and technology, where strategic investments can drive sustainable economic growth and development,” Semasinghe said in his X (Twitter) platform. 
“We reviewed the current macro-economic landscape of Sri Lanka, including recent reforms that have transformed to results. Glad to concluded the forum by marking constructive dialogue and a shared commitment to support the economic development of Sri Lanka.” 
“We thank participants, stakeholders holders and global partners for the significant interest shown in unlocking the full potential of the Sri Lankan economy and fostering greater international understanding and cooperation.” (Colombo/April 16/2024) 
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