Aug 8 – Colombo’s Finance Ministry which runs budget deficits and the Central Bank which compounded fiscal debacles by printing money, is the main source of macro-economic instability in Sri Lanka, economists said.
Sri Lanka’s Finance Minister (who has the power to spend large volumes of money suddenly without taxing people) and Governor of the Central Bank (who has a monopoly in creating new money) is responsible for maintaining economic stability in the country.
“Unfortunately these two positions were the main sources of macro-economist instability in the country,” W A Wijewardene, a former Deputy Governor of the Central Bank told an economic forum in Colombo.
A revised budget in 2015 was probably the worst since a budget for 2004 was de-stabilized by a new administration by printing money sending the rupee down to 105 from around 94 and inflation to 20 percent from zero as the US Fed fired a commodity and housing bubble with low interest rates.
In 2015, the rupee collapsed from 131 to 147 (with US tightening policy amid a subdued banking sector in that country and commodity prices being benign) as over 200 billion rupees was printed to finance the budget deficit and accommodate fleeing capital.
“My assessment is that the excesses of the (Mahinda) Rajapaksa years had not been fundamentally corrected so far and in some respects it had got worse,” Razeen Sally, a plain-speaking international economist who now chairs Sri Lanka’s Institute of Policy Studies said.
“We had, in my view two very bad budget last year. There has been excessive increases in public sector spending, on salary increases, on new entitlements. The tax system has continued to deteriorate.”
“There had been too many ad hoc measures on taxation. Business is understandably very vexed because of the high levels of unpredictability uncertainty that continues from the last regime.”
Sri Lanka imposed retrospective taxation on firms in 2015, extending the harm to the country’s image as a safe investment destination, by building on the negative effects of Rajapaksa-era expropriations.
“Monetary policy in my view was far too loose following the excesses of fiscal policy,” Sally said.
“I welcome very much the excellent appointment of the new Governor (of the Central Bank).
“I think he understands the situation very well…
“The task of central bank is fundamentally is to ensure macro-economist stability, at its core price stability – not to compound the errors of fiscal policy.”
Newly appointed Central Bank Governor Indrajit Coomaraswamy said the country seems “to be on the cusp” of putting measures for sustained growth and development.
He said both with Finance Minister Ravi Karunanayake and President Maithripala Sirisena underlined the need to fix budget deficits.
“If you look back at the last 30 years, that has been the main source of instability.” Coomaraswamy said.
“So if we can crack that, we are able to create the kind of foundation that is necessary for the private sector to invest, create jobs and thrive.”
(INPUTS FROM ECONOMYNEXT)