Sri Lanka taking corrective steps to fix imbalances: economists

Feb 29, 2012 (LBO) – Sri Lanka has taken delayed corrective steps to counter a balance of payments crisis triggered by a credit bubble worsened by energy price manipulation and state enterprise losses, but more pain may be ahead, economists warned. In 2011 Sri Lanka saw a surge in private sector credit fired by extended loose monetary policy and credit backed energy price manipulation resulting from pressure mounting on the exchange rate.

In February authorities allowed the rupee to fall to match underlying loose monetary conditions and raised both energy prices ending price deceptions and also interest rates.

Credit curbs on banks – which analysts warn is less successful than rate hikes – were also imposed.

“If you had squeezed fiscal policy, one could have accommodated expansionary monetary policy,” Indrajith Coomaraswamy, an economist told members of the Sri Lanka Association of Exporters.

“So it was inevitable that we were on a trajectory towards a crisis and it was necessary to take these very painful measures.”

He said it was “commendable on the part of the government to have changed track.”

Shocks

State deficit spending of around 7.0 percent of gross domestic product 2011, was worsened by losses