Macroeconomic effect In Sri

Lanka

Contents

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 1. Abstract……………………………………………………………………………..03
2. Introduction…………………………………………………………………………04
3. Analysis/discussion (supported by simplified statistical evidence)
a. Government whether in a position to achieve its growth objectives while
Carrying out a fiscal consolidation programme……………………………..05
4. Conclusion………………………………….……………………………………….08
5. References…………………………………………………….……………………..09

1. Abstract

The Macroeconomic for the most part incorporate into general execution in the economy. In that,
Macro financial goals and macroeconomic factors are got an extraordinary place. In this article is

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required to break down general financial development, value security, joblessness and exchange
adjust as macroeconomic factors. As per that, this article is engaged to inspect macroeconomic
patterns in Sri Lankan economy from 2003 to 2013. For this investigation optional information
have been utilized by utilizing Central bank reports. By concentrate above factors in the
economy, can ready to end up a consistent buyer. As indicated by break down the monetary
development has expanded in 2013. The business area is given a noteworthy commitment to
GDP. Macroeconomic soundness is an essential condition for high monetary development. Be
that as it may, the solidness of macroeconomic condition debilitates in making a vulnerability
economy with swelling. At the point when the most recent years (covering 2003-2013) are
considered, joblessness rate has diminished quickly. It is great position for building up the
nation. In any case, exchange deficiency has expanded. That is a principle issue for steadiness of
the nation. At last, we can reason that the nation needs to accomplish the objectives the Socio
Economic solidness. Catchphrases: Macroeconomic patterns, Sri Lanka.

Macroeconomic is one of the two broadest fields in Economics. It is the branch of financial
aspects that reviews the conduct and execution of an economy in general.

2. Introduction

An island nation situated at the Southern tip of India, Sri Lanka is often referred to as the Pearl of
the Indian Ocean. With the end of a bitter three decade long civil battle, the country is taking

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advantage of new found peace and constancy and growing economic prosperity to make its spot
as a global logistics hub.

Since the finish of the war in May 2009, the economy has boarded on a period of exceptional
development and fortune. Forcefully advancing financial development and flourishing as it
focuses on a GDP development rate over 8%, in its Ten Year Horizon Development Framework,
the Government intends to contribute generally US$4.5 billion on broad foundation extends in
control, streets, water supply and ports. These incorporate the development of five global ocean
ports and a moment universal air terminal, propelled street organizes, the advancement of cutting
edge correspondence arranges and in addition overhauling different offices and administrations
to worldwide principles. The scan for oil and gas is likewise a point of convergence of monetary
restoration designs.

Loose full scale monetary strategies, tallying a lower charge administration, the unwinding of
strict remote trade controls, BOI changes, bring down loan fees and general financial
judiciousness have made a speculator agreeable air, pulling in expanding Foreign Direct
Investment, adding to around 5% of the nation's GDP in 2011. These and different measures
focusing on enhanced administration including diminished organization and debasement earned
the nation a higher worldwide intensity file positioning in 2011, putting it over its capable
monetary neighbor India, and in addition a financial opportunity and administration positioning
higher than most territorial partners.

3. Analysis/discussion (supported by simplified statistical evidence),

a. Fiscal consolidation programme?

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As you mindful, monetary strategy alludes to the administration's tax collection, use and
deficiency financing activities. Financial approach impacts the large scale economy through
various ways; it changes the level and structure of total request (through tax collection, use and
borrowings), changes total supply (through tax assessment and sponsorships and additionally its
effect on reserve funds and speculation), and impacts national reserve funds and ventures
(through use and tax collection). Financial approach is actualized through the administration
spending plan and under segment 148 of the 3 Constitution of Sri Lanka, the control and duty of
the general population funds in the nation is vested with the Parliament. Under the Monetary
Law Act (MLA), the Central Bank of Sri Lanka is endowed with the duty of guaranteeing cost
and financial soundness, and money related framework dependability of the economy. This
includes the definition and execution of financial approach i.e. the activities to impact cost and
accessibility of cash and exercises identified with directing and regulating key classes of money
related organizations, keeping up soundness in key monetary markets and managing the
installments and settlements framework. These are corresponding yet unmistakably isolate parts.
It is, consequently, authentic to ponder on what premise the Central Bank Governor can talk
about income, use, spending shortages, deficiency financing, obligation, monetary solidification
and such issues, which commonly are the duty of the legislature.

"After decades of policy forbearance and missed opportunities, Sri Lanka is at an inflection
point. There exists the potential for a leap in development. The government is currently engaged
in implementing a broader policy package, aimed at harnessing the country’s untapped potential
by effectively leveraging its excellent location and international relations with many capital
surplus countries in the world. The government is also in the process of implementing a strong
fiscal consolidation programme. The Central Bank is also aligning its policies and processes to
deliver better outcomes in the future. So, the topic is very relevant to all of us in today’s
context".

Fiscal and Monetary Policies

As you aware, fiscal policy refers to the government’s taxation, expenditure and deficit financing
operations. Fiscal policy influences the macro economy through a number of ways; it changes
the level and composition of aggregate demand (through taxation, expenditure and borrowings),
changes aggregate supply (through taxation and subsidies as well as its impact on savings and
investment), and influences national savings and investments (through expenditure and taxation).
Fiscal policy is implemented through the government budget and under section 148 of the
Constitution of Sri Lanka, the control and responsibility of the public finances in the country is
vested with the Parliament.

These are complementary but distinctly separate roles. It is, therefore, legitimate to wonder on

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what basis the Central Bank Governor can speak about revenue, expenditure, budget deficits,
deficit financing, debt, fiscal consolidation and such issues, which typically are the responsibility
of the government. As I proceed with this speech, I hope the reasons for doing so will become
clear. There are important inter-linkages which place a very high premium on good fiscal -
monetary coordination.

Budget Deficits and Inflation

It is is widely accepted that fiscal deficits resulting from low revenue and/or high expenditure, if
monetised would fuel inflation (Buiter, 1985)3. The magnitude of this effect could be
significantly large, if there exists fiscal dominance such that monetary policy is accommodative
to fiscal deficits. The question whether larger public deficits are always associated with higher
inflation is answered affirmatively by Sargent and Wallace (1981)4 in their piece on "Some
Unpleasant Monetaristic Arithmetic". Many research studies, including Easterly & Schimdt-
Hebbel (1993)5, however, find that various factors, such as unstable demand for money,
exchange rate depreciation, and widespread indexation, cloud the link between monetization of
fiscal deficits and inflation over shorter periods. Notwithstanding these views, unsustainable
budget deficits are a serious concern for governments and policymakers. Financing them, using
domestic funds, crowds out the private sector thereby hindering investment activities. Rising
interest rates are the mechanism through which this takes place. In addition, foreign financing
tends to magnify foreign exchange exposure risks.

Role of the Government and Macroeconomic Stability

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According to Richard A. Musgrave, widely regarded as the founder of modern public finance,
"the proper roles of government in a market economy fall into three separable branches:
allocation (efficiency), distribution (fairness) and macroeconomic stability. The Allocation
Branch’s responsibility is to correct for sources of inefficiency in the economic system while the
Distribution Branch ensures that the initial distribution is fair. Monetary and fiscal policy and the
problems of macroeconomic stability fall to the Stabilization Branch".

Macroeconomic stability is essential for high and sustainable growth. However, macroeconomic
stability by itself does not ensure high rates of economic growth. It is a necessary but not
sufficient condition. In most cases, sustained high rates of growth also depend upon key
structural policies as well. The Central Bank has a central role to play in macroeconomic
management, in particular the stabilisation role, to achieve sustainable growth. It has
responsibility for two of the three key macroeconomic instruments, namely the interest and
exchange rates.

Sound Monetary - Fiscal Coordination

This is not an easy task to achieve. Monetary – fiscal coordination is a complex but vital
component in overall macroeconomic management. As Mervyn King, the former Governor of
the Bank of England, stated, "Of course, it is very important that they (monetary and fiscal
policy) go on working together. From our point of view, that means two things. The first is that
we are kept closely informed what is happening to fiscal policy and to revenues and expenditures
– and we are briefed where necessary by the Treasury representative at our meetings – and
secondly, and more importantly, that the government sticks to its own fiscal rules, namely fiscal
policy does in fact meet its medium term objective. From that point of view, we know what the
stance of fiscal policy is and in turn, the Chancellor knows that if there were changes in the fiscal
policy that we would take those into account when assessing the likely movement of demand in
the economy. And that would be one of the factors that would lead us to look at the overall
picture and if necessary, respond by a change in interest rates".

In Sri Lanka also, we should understand that monetary or fiscal policy cannot be implemented in
isolation. These two affect each other due to the associated macroeconomic dynamics. Political
and social conditions of the country, as well as the global economic developments also impact on
the conduct of these two policies. The overall budget deficit, and the way it is financed, has
important implications, for monetary policy related variables, such as interest rates, money
supply, inflation, external reserves and the exchange rate which come under the purview of the

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Central Bank. Similarly, the external balance of the country, as reflected by the current account
deficit of the balance of payments (BOP), also has important implications through variations in
domestic financial assets of the Central Bank, which determine the level of reserve money while
influencing the money supply, interest rates, inflation and the exchange rate, as well as overall
aggregate demand in the economy. This, in turn, affects fiscal policy through taxation,
expenditures and deficit financing.

The upshot is that monetary and fiscal policies are interrelated within a complex relationship in
an open-economy macroeconomic framework. Hence, in the operations of the Treasury and the
Central Bank, a fine balance has to be maintained through sound monetary – fiscal coordination
amidst domestic shocks and volatile global economic conditions. The Monetary Law Act, which
governs the Central Bank of Sri Lanka has provided an enabling legal environment to maintain a
sound relationship with the Ministry of Finance, which is the fiscal authority of the country.
Going forward, we need to calibrate our policies carefully to achieve sound management of
aggregate demand. This is crucial for attaining robust macroeconomic fundamentals.

Need for Fiscal Consolidation

With this background, let me come to the core of our topic today. As you are aware, large fiscal
and current account deficits, or twin deficits, are the two key structural problems in Sri Lanka
that have been amplified as core weaknesses of the economy for many decades. Throughout this
period, the country has been running unsustainable budget deficits, which have boosted excess
and untenable demand, leading to inflationary pressures and high nominal interest rates in the
economy. This also leads to a higher propensity to import amidst domestic supply limitations,
thereby exerting pressure on the BOP and the exchange rate. In an uncertain and volatile global
economic environment, especially in today’s context, this twin deficit situation of the country
increases vulnerability. Hence, clear and consistent policies are required to have a sustainable
solution to overcome the twin deficits. On the one hand, trade related policies are necessary
remedial actions to address weaknesses related to the deficit in the current account of the balance
of payments. These are being implemented by the government. In this presentation, I will
concentrate on the other important area, which is related to the budget deficit and fiscal policy of
the country in the context of maintaining macroeconomic stability to achieve sustainable growth.

It is a fact that high fiscal deficits and relatively high debt to GDP ratios jeopardize the prospects
for medium-term debt sustainability9 and growth. In Sri Lanka, the overall budget deficit in the
period from 2005 – 2015 has averaged 6.8% of GDP. The government debt was 76% of GDP in
2015, which is relatively high compared to our peer rating countries. Although attempts have

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been made in the past to tackle the high debt to GDP ratio, they have not yielded lasting gains.
At present, interest payments on the existing debt stock absorb about 35% of our total revenues.
In addition, debt amortization obligations absorb a further 56% of our total revenue. Hence,
around 90% of revenue was absorbed by total debt service payments in 2016. The problem has
been compounded now that Sri Lanka has become a lower middle income economy as a result of
its increased per capita income. This has resulted in a gradual decline in concessional budgetary
financing from donors, while increasing exposure to non-concessional and commercial
borrowings.

Conclusion.

As we observe economic trends of Sri Lanka, the country had fluctuations on their economic
growth. As two countries are developing countries, fluctuations on their economy are mainly
related to world economy. Reflections of natural disasters are the second major factor that caused
slowdowns in the economic growth of these countries. Terrorist attack on 11th September 2001
and Tsunami disaster caused economic downturns the country. During the periods of recession
and contraction, the central banks used several policies to recover their economy. Even though
central bank uses only monetary policies to sustain their economy, government of Sri Lanka used
both fiscal and monetary policies to retain their favorable economic position.

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 4. References

Dharmawardana (2018). Macroeconomic situation in Sri Lanka. [Online] Slideshare.net.

Available at: https://www.slideshare.net/thushan89/macroeconomic-situation-in-sri-lanka-
10192024 [Accessed 10 May 2018].
Nhrep.gov.lk. (2018). Macroeconomic policies. [Online] Available at:
http://www.nhrep.gov.lk/index.php?
option=com_content&view=article&id=71&Itemid=59&lang=en [Accessed 10 May 2018].
Cbsl.gov.lk. (2018). Macroeconomic Chart Pack | Central Bank of Sri Lanka. [Online] Available
at: https://www.cbsl.gov.lk/en/statistics/economic-indicators/macro-economic-chart-pack
[Accessed 11 May 2018].
Focus Economics | Economic Forecasts from the World's Leading Economists. (2018). Sri Lanka
Economy - GDP, Inflation, CPI and Interest Rate. [Online] Available at: https://www.focus-
economics.com/countries/sri-lanka [Accessed 10 May 2018].

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