One year into the pandemic, Sri Lanka’s already tight fiscal space has become further constricted, leaving some tough decisions to be made in the pandemic recovery period. A third wave of COVID-19 that the country is currently experiencing will further delay such recovery efforts. Although some fiscal tools have been included in Sri Lanka’s COVID-19 recovery plan, there is consensus that the size and scale of the country’s fiscal stimulus package have been inadequate against the scale of the crisis. Conversely, wealthier countries have been rolling out some of the historically largest fiscal stimulus packages. This blog discusses the global tilt towards fiscal policy reliance in the aftermath of the pandemic and deliberates on how far the developing world can adopt a similar strategy.
The formation of the world’s largest regional trade bloc – the Regional Comprehensive Economic Partnership (RCEP) in November 2020 – on Sri Lanka’s doorstep raises fresh questions about how the country will navigate its most recent Asia-centric re-positioning.
The Sri Lankan economy is likely to face a contraction in 2020 as a direct result of the COVID-19 pandemic but there is potential for this to be followed by a sharp V-shaped economic recovery. The means of navigating such a recovery path were discussed at a webinar panel discussion held last Thursday (15th October) to mark the release of the Institute of Policy Studies of Sri Lanka’s (IPS) flagship report ‘Sri Lanka: State of the Economy 2020’.
February 2014 marked five consecutive years of single-digit rates of inflation in Sri Lanka – supposedly the longest spell in the country’s post-independence history. Quite rightly, the Central Bank of Sri Lanka (CBSL) can take its share of credit for this success, especially in view of historic high and volatile inflation rates of the past. Indeed, the scale of monetary stability becomes clear when considering the fact that inflation rates hit a peak of 22.6 per cent in only 2008 before settling to single digit levels from February 2009. Despite five years of a moderate inflationary environment and higher average economic growth during that period, private investment trends have been modest. The monetary authorities are struggling to revive credit appetite in spite of signaling the end of a tight monetary policy stance way back in December 2012. Credit growth to the private sector was extremely sluggish at 7.5 per cent in 2013. It has continued in the same vein so far in 2014, recording a growth of only 4.4 per cent year-on-year in February.
Sri Lankan authorities often point out that Sri Lanka has not been as badly affected by the Federal Reserve’s tapering of quantitative easing (QE) as other emerging/frontier economies. In a conventional sense, this may be correct. Yet, this article considers how QE tapering affecting world gold prices impacted Sri Lanka through the gold pawning channel. It argues that US tapering has in fact had a very significant impact on the Sri Lankan economy, in terms of monetary contraction, consumption, bank asset quality and also in terms of financial inclusion.