Stabilization policies need to be continued; no looking back- Senior economists

It is important that stabilization policies taken by the authorities are allowed to run their course and failure to do so will increase the depth and duration of Sri Lanka’s present economic outlook, a group of leading economists and professionals noted.

Pathfinder Foundation, a private organisation consisting of a number of senior economists and professionals, releasing a statement stressed that it is important that the authorities abide by the policy commitments that they have made in the recent past.

“These policy measures should be supplemented by a new package of reforms that increases the competitiveness of the economy and strengthens its growth framework,” the foundation added.

According to t hem, t he simultaneous pressure on the exchange and interest rates indicates that the adjustment necessary to stabilize the economy or address the sharp deterioration in the external position is not complete as yet.

They also pointed out that there are certain lessons that can be learnt from the recent policy mistakes and authorities need to resist imminent pressure to manipulate the exchange and interest rates.

“A very high price has to be paid in terms of the deterioration in the external finances; the foregoing of growth and employment; and the increase in the burden on the people, if economic policies seek to defy market forces,” the statement issued by the organisation said.

It also asserted that no one can hold down interest rates and support the value of the rupee at the same time, when there are imbalances in the economy.

“The less the exchange rate is allowed to adjust towards its market-determined value, the higher the interest rates will have to be allowed to move and vice versa.”

According to the Pathfinder Foundation, another lesson to be learnt is that the failure to respond to global trends in a timely manner, for instance, an increase in the oil price, inevitably results in more painful action further down the line.

The organisation argues that the challenge for the authorities is to use all the available macroeconomic instruments to achieve the most growth/ employment oriented stabiliza- tion trajectory, while containing the adverse effects on the poor and vulnerable.

“The policy stance adopted during August 2011 – February 2012 clearly demonstrated that attempts to resist market pressures are extremely costly,” the foundation said.

The organisation of economists went on to state that attempts to defend the misaligned policies resulted in $3.6 billion being spent on propping up the rupee and a hemorrhaging of a quarter of the country’s foreign reserves, much of it borrowed from abroad on commercial terms.

Following the measures taken by the authorities, pressure on the currency was expected to ease after the New Year.

However, there has been no sign of this as yet.

In addition, the Central Bank has announced that it will stop supplying dollars for oil imports from May 2012 as part of its efforts to build up its depleted foreign reserves.

According to the Pathfinder Foundation, this will inevitably exert further pressure on the value of the rupee.

Sri Lanka’s Central Bank has raised the Repurchase and Reverse Repurchase rates by 50 and 125 basis points (bps) respectively. However, these actions are trailing well behind the markets. Treasury bill rates have increased by over 400 bps, since August 2011. Last week’s Treasury bill auction on April 18 saw yields rise across all maturities.