Sri Lanka’s main business chamber says apart from the adverse global economic conditions, misaligned macroeconomic policies, particularly the exchange and interest rates, also contributed significantly to the sharp worsening of the trade and current account deficits of the balance of payments.
However, the Ceylon Chamber of Commerce commends the government for taking corrective steps to address the situation by introducing a package of “courage’s macroeconomic stabilization measures” during the months of February and March 2012.
“These were necessary to avert the balance of payments crisis that was looming on the horizon. While these measures
were commendable, there is no room for complacency” cautions the Chamber in a statement issued.
It also points out that the data for March/April compels continued caution and a careful monitoring of developments in the balance of payments, particularly the trade deficit.
The Chamber, however says there is also a need to recognize that the balance of payments cannot be placed on a more sustainable footing merely through increased foreign borrowing.
It says, this type of an approach only serves to raise the risks associated with the economy at a time of elevated global economic uncertainty.
“Priority should be attached to creating the conditions for building up “net reserves” through increased exports of goods and services, more remittances and a higher level of non debt-creating capital inflows (FDI and portfolio flows into the stock market)” the Chamber statement added.
According to CCC, pain in the short-term is inevitable if the balance of payments imbalances that were allowed to emerge in the second half of last year are to be addressed on a sustainable basis.
The Chamber also points out the important lesson to be learnt from last year’s experience is that efforts to maintain an over-valued exchange rate and hold down interests rates simultaneously, invariably result in a worsening of the trade deficit, pressure on the currency and a loss of reserves.
“A repetition of such a policy mix is likely to result in a balance of payments crisis which would have destructive effects both on businesses and the lives of the people of this country” further added the chamber in its statement issued this afternoon.
The Chamber believes that the Government’s use of all macroeconomic instruments such as the flexible exchange rate management, monetary tightening and fiscal measures, took place earlier this year offers the most promising path for addressing the imbalances that have emerged in the economy.
“There is now a strong case for staying the course on this approach until there is clear evidence that the balance of payments have achieved medium-term stability” The CCC says.
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