Top policy advocacy institute, the Pathfinder Foundation (PF) last week warned that it will be important the present stabilization policies adopted by the Central Bank of Sri Lanka in recent times are allowed to run their course and that failure to do so will increase the depth and duration of the economic downturn. In a comment issued by the body, it stated that although both the exchange and interest rates came under some pressure last week, despite the courageous reforms introduced by the Authorities in early February 2012, it is important, however, to learn from the policy mistakes of the recent past and to resist imminent pressure to manipulate these two key economic prices.
“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,” PF said in their recent comment titled ‘no more backtracking’.
They noted that the policy stance adopted during August 2011 – February 2012 clearly demonstrated that attempts to resist market pressures are extremely costly with the attempt 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.
“The following lessons should be drawn from the recent policy mistakes. 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. 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. The failure to respond to global trends in a timely manner (e.g. an increase in the oil price) inevitably results in more painful action further down the line,” they commented.
Meanwhile, PF said that although the Central Bank has raised the Repurchase and Reverse Repurchase Rates by 50 and 125 basis points (bps) respectively the continuation of the rise of market-determined interest rates suggests that these actions are trailing well behind the markets.
“The simultaneous pressure on the exchange and interest rates indicates that the adjustment necessary to stabilize the economy (i.e. address the sharp deterioration in the external position) is not complete as yet,” the statement further pointed out.
“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,” PF said in their recent comment titled ‘no more backtracking’.
They noted that the policy stance adopted during August 2011 – February 2012 clearly demonstrated that attempts to resist market pressures are extremely costly with the attempt 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.
“The following lessons should be drawn from the recent policy mistakes. 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. 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. The failure to respond to global trends in a timely manner (e.g. an increase in the oil price) inevitably results in more painful action further down the line,” they commented.
Meanwhile, PF said that although the Central Bank has raised the Repurchase and Reverse Repurchase Rates by 50 and 125 basis points (bps) respectively the continuation of the rise of market-determined interest rates suggests that these actions are trailing well behind the markets.
“The simultaneous pressure on the exchange and interest rates indicates that the adjustment necessary to stabilize the economy (i.e. address the sharp deterioration in the external position) is not complete as yet,” the statement further pointed out.
