Economics, USA, the Fed’s performance and lessons for Sri Lanka

Monday, 25 April 2022 00:00 - - {{hitsCtrl.values.hits}}

By Ranel Wijesinha

The Economist cover story this week says that America’s Central Bank has made a big mistake. The Federal Reserve has suffered a hair raising loss of control, with consumer prices 8.5% higher than a year earlier, the fastest annual rise since 1981.

America has released oil from its Strategic Petroleum Reserves – reserves which smaller economies such as ours do not have the capacity to hold and thus, are exposed to the cyclicality of oil prices, whether driven by monopoly pricing of producer or other cartels, or wars readily fought by nations – a luxury we do not enjoy. The USA experienced the worst overheating in a big and rich economy, in the 30-year era of inflation targeting central banks, and its pandemic stimulus of 25% of GDP, is the highest in the rich world.

At home, we are experiencing multiple crises. Irrational, perhaps even reckless vote-getting fiscal/taxation strategies, inherited but part self-inflicted, dollar denominated debt burdens, imprudent exchange rate management, loss of control over runaway inflation, a two-year-long pandemic – a challenge to any Government or Central Bank anywhere. The Governor of our Central Bank, the Finance Minister and a team of economists are presently in negotiations with the IMF. I’ve seen the evolution of the thinking, accommodation, intervention and arrangements of the IMF. I believe that Sri Lanka, has considerable potential, to emerge out of its current quagmire, even if part self-inflicted.

Against that background, I was happy to see the IMF press release of yesterday – particularly the words “the importance of stronger social safety nets, to mitigate adverse impact, of the current economic crisis, on the poor and vulnerable.”

I like to see creativity driven by sensitivity on the part of the IMF and a realisation on the part of our political leaders of all colours, and key public officials at regulatory and supervisory institutions that abuse, excesses, recklessness, must necessarily be replaced with honesty, integrity, independence, objectivity, discipline and accountability.

As a Sri Lankan, for whom this country is an only home, with no intention to adopt any other home anywhere, I have an expectation that better sense must prevail on all fronts and soon, whether through structural, extended, emergency or rapid financing instruments.