On LBO : Deshal explains what's wrong with Sri Lanka's economy

Aug 01, 2016 (LBO) – Sri Lanka’s most urgent economic risk is external debt sustainability and it has been one driving factor behind macroeconomic volatility in the country, a young economist said.

Deshal de Mel delivering a public lecture hosted by the think tank Advocata Institute said the legacy of access to long term concessional debt and easy repayment schemes eventually enabled the country to build up a large public sector and debt burden.

“Post 2007 requirement to tap into global capital markets due to less access to concessional borrowings is one major reason,” de Mel said.

“Shorter repayment tenors and higher rates of interest – makes it essential to channel borrowings into remunerative investments.”

De Mel said high government borrowing levels influenced higher interest rates and crowded out private investment.

He said recent balance of payments weakness has been largely influenced by external debt repayments with implications for rupee depreciation.

“At other times fiscal expansion drives imports, contributing to Balance of Payments stress and rupee depreciation,” Mel said.

“Episodes of inflation in the past influenced by Central Bank’s accommodative monetary policy to ease government debt servicing.”

Financing the current deficit requires high levels of indirect taxation and it also affects consumer freedom and high import taxes restrict domestic competition.

As per statistics, government revenue has improved in first half of 2016 but sustained improvement needs a shift to direct taxes from regressive indirect taxes, he said

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