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Sri Lanka's 2017 economic growth may fall below 4.5-pct

Nov 08, 2017 08:53 AM GMT+0530 | 0 Comment(s)

ECONOMYNEXT - Sri Lanka's economic growth may be a little over 4.0 percent, amid a drought and but there was potential for stronger longer term growth if more private investment comes, Central Bank Governor Indrajit Coomaraswamy said.

"Growth (in 2017) would probably be higher than 4.0 (percent), I do not know whether we will quite make it to 4.5 (percent), Governor Coomaraswamy said.

The central bank has been trying to slow credit growth after it fired a bubble by printing hundreds of billions of rupees in 2015 as the budget deficit also expanded, which spilled over the balance of payments and scared away foreign investors in bonds.

In 2016, growth came down to 4.4 percent after spiking to 4.7 percent in 2015 from 4.3 percent in 2016.

Such 'stimulus' with deficit spending tend to show higher real growth when money printing starts as inflation does not show up immediately, leading to a false belief that such methods actually deliver results.

Subsequent currency collapses, leading to higher inflation, kill domestic demand and purchasing power, impoverishing people as the economic stabilizes.

Currency collapses also kill real capital, as more money is required build the same building, or buy equipment, after the price structure in the country changes to match the depreciated currency. Classical economists say such 'Keynesian stimulus' is a mirage. Deficit spending however may cause less damage when overal credit growth is negative.

In 2016 and 2017 Sri Lanka also ramped up thermal energy production as a drought hit the country, and more food was imported.

In the way gross domestic product is measured, imports tend to depress the total value added in a domestic economy.

Sri Lanka also raised value added taxes in 2016, as more money was sought from the people to pay state sector salaries and subsidies raised in a runway budget in 2015.

In general, state spending using other people's money, is less productive than private spending, and can also reduce long term growth.

However Governor Coomaraswamy said if the budgets deficits are kept low in the future, and the economy remains stable investor confidence will increase. Sri Lanka is currently in the prcess of strengthening the 'growth framework' to unleash private investments.

Most countries in East Asia also achieved long term growth by running tight budgets, and operating stable or fixed exchange rates by avoiding money printing to keep inflation down. (Colombo/Nov08/2017)
 


 

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