Policymakers urged to shift gears from short term goals to a more stable course

by Sanath Nanayakkare

A former Deputy Governor of the Central Bank of Sri Lanka yesterday urged the country’s economic policymakers to develop and propose economic strategies and policies to benefit the overall economy in the medium to long term as their short-term measures such as import restrictions and excess money supply in the market through money printing could cause negative repercussions.

Dr. W.A. Wijewardena made this comment while speaking at a virtual presentation and panel discussion on the Sri Lanka Development Update 2021 launched by the World Bank.

“Increasing the money supply faster than the growth in real output will cause inflation. The money supply growth numbers so far warn us of an accelerated inflation. In fact, inflation in Sri Lanka is a ‘historical heritage’ which is higher than many global rates including the annual inflation rate in the US,” he said.

“The Central Bank quickly made an emergency pandemic response to limit the human and economic impact of the COVID-19 pandemic, and now it’s appropriate to come up with aggregate policy direction for sustaining the economy in a medium to long term scenario,” he said.

“The headline inflation as shown by the increases in the Colombo Consumers Price Index is widely believed to be misleading due to the wide range of price controls imposed by the government to relieve the public of high cost of living,” he said.

Wijewardena noted that import controls would not help keep the dollar-rupee exchange rate in check. “Import controls was a sort of ‘firefighting’ exercise by the government to preserve the depleting foreign reserves with the maturing debt stock looming large. Import controls disrupt the input supply and may harm the export performance. So we need to have an ‘exit time-line’ on import controls. However, if a ban is slapped on the import of chemical fertilizer, that would be seen as an extension of the current import controls”, Wijewardena said.

“Addressing the macroeconomic imbalances is crucial at this juncture. Short term policy has not addressed the new reality. Bank lending to the MSME sector remains low. Many individuals and businesses affected by the pandemic have been put into the CRIB, they need to be brought back to play their role in the economy. While informal workers are more likely to suffer earnings losses, formal workers have been affected as well, As the World Bank Update on Sri Lanka notes, social safety nets should be better targeted toward the poor and vulnerable, and adjusted to allow for support to be scaled up quickly and effectively in times of crises. I urge the authorities to review the overall situation and use it as an opportunity to introduce necessary socio-economic reforms,” Wojewardena said.