Sri Lanka economic bubble triggered by financial repression for deficits: economist

Sept 14, 2009 (LBO) – Severe financial repression and money printing to finance post-2004 deficits triggered a housing and credit bubble and drove savers to seek higher rates in unregistered financial institutions, an economist has said. “These macro-economic imbalances set the stage for bubbles in the economy,” R M B Senanayake, vice president of the Sri Lanka Association of Economists (SLEA) at its annual sessions.

“There were bubbles in land and property values and the construction of apartments.

“It is these macro-economic imbalances combined with monetary expansionary policies, particularly the repressed low interest rates that set the stage for the bubble in the leasing of motor vehicles.”

Deficit Spree

Sri Lanka’s current deficit spending spree started in 2004, with subsidies for fuel and massive expansion of state employment which was largely financed with printed money.

Despite rising deficits the Central Bank kept policy rates low and also intervened in primary Treasury bills markets, in a process of ‘quantity easing”, or active money printing.

Sri Lanka’s Central Bank also has to give ‘provisional’ advances or directly printed overdrafts to the Treasury under its constitution as it now s