Releasing a statement yesterday, the CCC noted that the Government had introduced a package of courageous macroeconomic stabilisation measures in February 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. The data for March/April compel continued caution and a careful monitoring of developments in the balance of payments, particularly the trade deficit.”
Furthermore it noted that macroeconomic policy-making should now be informed by the lessons to be learnt from the sharp deterioration in the country’s external account in 2011. Adverse global economic conditions, particularly the rise in oil prices, were an important causal factor.
However, it is important to recognise that 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.
“An 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. “
CCC emphasised that the Government’s use of all macroeconomic instruments (flexible exchange rate management, monetary tightening and fiscal measures) 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.”
It went on to say there is also a need to recognise that the balance of payments cannot be placed on a more sustainable footing merely through increased foreign borrowing. This 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).
“Macroeconomic stability is a crucial element of a conducive investment climate and favourable operating environment for business. Above all, it protects the living standards of ordinary people. 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 revival of the economy can be accelerated if the stabilization measures are supplemented by a package of reforms that strengthen the investment climate and growth framework.”
The CCC advised that in assessing the future course of its policy framework, the government should take full account of the highly uncertain global economic environment, the ongoing macroeconomic stabilisation challenge and Sri Lanka’s increased exposure to rating agencies and international capital markets.
“In this context the recent statement of an ongoing programme with the IMF by the Senior Minister for International Monetary Cooperation Sarath Amunugama is encouraging,” it said..