{"id":239241,"date":"2024-10-16T08:02:49","date_gmt":"2024-10-16T02:32:49","guid":{"rendered":"https:\/\/www.colombotelegraph.com\/?p=239241"},"modified":"2024-10-22T06:23:48","modified_gmt":"2024-10-22T00:53:48","slug":"people-of-sri-lanka-need-answers-to-following-questions-from-imf","status":"publish","type":"post","link":"https:\/\/www.colombotelegraph.com\/index.php\/people-of-sri-lanka-need-answers-to-following-questions-from-imf\/","title":{"rendered":"People Of Sri Lanka Need Answers To Following Questions From IMF"},"content":{"rendered":"

By Hema Senanayake<\/a> –<\/span><\/strong><\/p>\n

\"\"

Hema Senanayake<\/p><\/div>\n

There is no doubt that theoretical understanding is crucial in making economic decisions because it provides a framework for analyzing complex economic phenomena, predicting outcomes, and helping pragmatic decision making. Hence this essay is going to submit a few questions to the IMF review team and the same questions will be submitted to the negotiating team of the government.<\/p>\n

Is the economy a disequilibrium system or equilibrium system?<\/strong><\/span><\/p>\n

Economy is a system with some structural inefficiencies or gaps that lead to persistent debt accumulation. These gaps necessitate borrowing for maintaining economic growth, creating a reliance on debt. Over time, this leads to excessive and unsustainable debt levels, contributing to financial instability and recurring crises. Sri Lanka experienced this crisis. Even developed countries are experiencing this phenomenon. American economist Lawrence Summers says that developed economies cannot achieve significant economic growth without creating unsustainable financial conditions which means without creating unsustainable debt bubbles.<\/p>\n

If structural gaps are the reason for unsustainable and persistent debt accumulation, how do those gaps originate? Fundamentally the most important gap originates when the supply and demand is met its equilibrium. All schools of economists agree that the supply and demand is met its equilibrium possibly with some small fluctuations as explained by general equilibrium theory. Keynesian economists agree with the theorem if a certain regulatory framework existed to prevent market failures.<\/p>\n

However, recently a question raised whether the supply and demand equilibrium are met by creating a component of debt that can never be paid back in the economic system. If it does, then the economy is a disequilibrium system. Or some can argue that the law of supply and demand operates without creating a component of debt that can never be paid back, then the economy is an equilibrium system. The IMF\u2019s answer to these two questions is very important. My first question to the IMF is whether the IMF agrees with the first notion or the second one.<\/p>\n

Will the IMF allow Sri Lanka\u2019s Central Bank to Expand Its Balance Sheet to Mitigate Debt Crisis?<\/strong><\/span><\/p>\n

Let\u2019s begin with the first question. If the IMF<\/a><\/span> theoretically agrees that the economic system is a disequilibrium system that creates a component of debt that can never be paid back, the IMF will agree that such a system needs to bring in a certain amount of debt free money outside the supply and demand mechanism to mitigate the heavy accumulation of debt. Developed economies do this. They define it as unconventional monetary policies. Use of these policy tools is new. Japan, the United States and European Union, and the United Kingdom used unconventional monetary policies to resolve debt\/economic crises. Unconventional monetary policies are nothing but the creation of new money electronically by central banks of those countries. They call it Quantitative Easing (QE).<\/p>\n

I agree that Sri Lanka cannot use unconventional monetary policies as those policies were used by developed economies. But surely Sri Lanka can print a certain amount of money subjected to a monetary rule which is linked to the GDP growth. An example is that Central Bank can print money subject to 1% of GDP growth, if credit growth can be contained at desirable level to contain inflation. Usually printing of money which is base money is wrong because banks can create nearly around ten times of \u201ccredit money\u201d based on newly printed money. Therefore, inflation is not purely resulting from printed money, instead inflation resulted from virtual money created by banks. If \u201cvirtual money creation\u201d by banks can be contained, inflation can be mitigated.<\/p>\n

In view of the above, will the IMF allow Sri Lanka\u2019s central bank to expand its balance sheet creating a certain amount of debt free money to be used by the treasury?<\/p>\n

Will the IMF Allow to Pay Part of the Tariff in Foreign Currencies?<\/strong><\/span><\/p>\n

Usually, the central bank has to purchase dollars from the market to build up the foreign exchange reserve level. During this process the central bank increases rupee liquidity in the market. Increased liquidity can cause inflationary situations. That is why the economic system needs a certain policy tool to mop-up excess dollars from the market, stabilizing exchange rate and increasing reserves.<\/p>\n

Requiring part of tariffs to be paid in a reserve currency can help the government directly accumulate foreign currency, increasing the country\u2019s foreign reserves. This is especially helpful for countries like ours that need to build reserves to stabilize the currency or meet international debt obligations. There are challenges and risks in implementing this policy. This means it requires the central bank and government to ensure mechanisms are in place for collecting and managing the foreign currency. It requires robust coordination between customs agencies, the central bank, commercial banks and the treasury. In view of the above, will the IMF allow us to use this policy.<\/p>\n

Avoiding Deflation Cycle<\/span><\/strong><\/p>\n

Recently, the governor of the central bank intimated that possibly there could be a deflation in the economy. This is dangerous and needs to be prevented, especially when the system is overindebted.\u00a0 <\/span>In a cycle of deflation, the burden of debt increases due to a few reasons such as rising real value of debt, falling incomes, higher real interest rates, decreased asset values, reduced borrowing and investment. If deflation continues, the increased burden of debt can lead to more defaults, bankruptcies, and a reduction in overall spending, further depressing the economy. Therefore, wage increase bound moderate inflation would be a better option than deflation. Will the IMF advise our monetary authorities to avoid any possible deflation.<\/p>\n

In view of the above, I conclude that Sri Lanka needs to have answers for all above questions in order to find the best possible solution to our debt and economic crisis.<\/p>\n","protected":false},"excerpt":{"rendered":"

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