In
a small open economy, like Sri Lanka’s, the response
to a build-up of excess domestic demand or to an exogenous
shock is likely to be either an increase in inflationary
pressures or (where initially the foreign exchange constraint
is not binding) excessive imports leading to external payments
imbalances. Both are harmful to the economy. Economic stabilisation
policies aim to restore sustainability to the balance of
payments, contain inflation, or both.
The concept of short-term stabilisation
is appropriate where the effects of disturbances to the
economy (whether endogenously or exogenously produced) can
be corrected quickly and sustainably. However, the persistence
of inflation and an external payments imbalance may reflect
more fundamental structural distortions, often exacerbated
by the particular vulnerability of developing countries
to external shocks. In such cases more broadly-conceived
programs of adjustment are needed to restore financial balance
and to increase the economy’s resilience to withstand
adverse external conditions. The correction of persistent
structural imbalances through longer-term adjustment policies
may well include an initial stabilisation component. In
this sense at least, stabilisation programs may be viewed
as a special sub-set in adjustment programs.
Many developing countries, perceiving the
need for far-reaching reforms during the 1980s, have especially
emphasized adjustment with growth-orientation as a means
of ensuring stable financial conditions. At the same time,
there has been growing recognition of the severe social
costs of some aspects of adjustment, and increasing attention
is being paid to alleviating the impact of adjustment on
the poor.
This paper is intended to identify issues
rather than to present a fully elaborated, formal framework.
The emphasis is on policy in general terms, although some
reference is made to the Sri Lankan experience. Subsequent
sections are organized as follows: Section II is an overview
of alternative perspectives on stabilisation and adjustment;
Section III reflects on issues in the design and implementation
of IMF-supported programs; Section IV briefly reviews the
Sri Lankan experience with the adjustment process; and Section
V suggests further issues germane to the study of instability,
and its structural causes in Sri Lanka.
Table of Contents:
- Introduction
- Alternative Perspectives on Stabilisation and Adjustment
- Reflections on Fund-Supported Adjustment Programms
- The Sri Lankan Experience
- Concluding Thoughts
- References
|
