‘Driving Policy Action in Sri Lanka from Economic Crisis to Recovery’

The Institute of Policy Studies of Sri Lanka (IPS) held a seminar on 25 October 2022 to coincide with the release of the Institute’s annual flagship report, Sri Lanka: State of the Economy 2022, on the theme Driving Policy Action from Crisis to Recovery. IPS researchers Chathurrdhika Yogarajah and Kimuthu Kiringoda captured the highlights of the discussion.

Session I: Economic Crises and Policy Adjustments for Stabilisation

Presenter:

Dr Dushni Weerakoon, Executive Director, IPS

Keynote Speakers:

Dr Nandalal Weerasinghe, Governor, Central Bank of Sri Lanka

K M Mahinda Siriwardana, Secretary to the Treasury/Ministry of Finance, Economic Stabilisation and National Policies

In her presentation, Dr Dushni Weerakoon drew attention to the need to minimise output losses in the short term amidst the ongoing economic challenges. Towards this end, (1) debt restructuring negotiations must be concluded as swiftly as possible and (2) credibility established by stabilising macroeconomic fundamentals. In the medium term, Sri Lanka will require more macroeconomic flexibility without throwing standardisation efforts into reverse, along with a gradual shift to an emphasis on growth aligned with an appropriate long-term policy framework.

Dr Weerakoon further noted that Sri Lanka’s inflation trajectory over the last few months had been driven primarily by high food inflation and increased transport costs. However, there has been a moderation in food price inflation in recent months. With Sri Lanka’s current elevated inflation levels, there is no scope for trade-offs. Anchoring inflation expectations is essential to help contain inflation at a lower economic cost. Equally, it is necessary to watch for wage catch-up in the context of the erosion of real wages, tax-related income cuts, and higher labour mobility.

Dr Weerakoon stressed the need to bring inflation under control to stabilise the exchange rate. Persistent high inflation leads to immediate or anticipated currency depreciation, as experienced during the last 12 months. The exchange rate has stabilised to some extent. Still, in recent months, because of the appreciation of the US dollar, exchange rates are coming under pressure again, and the Sri Lankan currency is no exception. Managing the exchange rate will continue to be one of the biggest macro policy challenges for Sri Lanka in the coming months.

The IPS’ annual flagship report, Sri Lanka: State of the Economy 2022 is available for sale at IPS, No. 100/20, Independence Avenue, Colombo 07, and at leading bookshops island-wide. For more details, contact Amesh Thennakoon, Mob: +9477 373 7717; Dir: +94-11-214 3107; Gen: +94-11-2143 100

Link to original blog:

https://www.ips.lk/talkingeconomics/2022/10/31/driving-policy-action-in-sri-lanka-from-economic-crisis-to-recovery/