Fed tapering might taper our growth - Editorial

10 July 2013 06:30 pm - 0 - {{hitsCtrl.values.hits}}

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A number of things have been said about the Sri Lankan economy in a number of recent reports by think tanks, research firms, international banks and rating agencies. While some argue that the tapering of stimulus by the US Federal Reserve will have negative effects on Sri Lanka and other emerging economies, others dispute the projected ramifications, asserting that pessimism is overdone.

Currently the world’s leading central banks -- the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England are bracing to trim their stimulus programmes adopted during the recession. The term ‘tapering’ means a possible slowing down of purchasing of bonds and mortgages by the Federal Reserve amid signs of recovery of the US economy.

In fact, the three key economic forecasts in 2012 for 2013 have now all gone wrong. Economists forecasted a slower recovery of the US economy in 2013 amid higher growth forecasts for China. They also projected the Japanese economy to slow down further.

But, proving all those projections as immaterial, the US economy is showing strong signs of recovery with unemployment coming down as opposed to the Chinese economy slowing down. The Japanese economy has also picked up steam despite the negative projections.

As a result of the strong signs of recovery shown by the US economy and also probably because of the fundamental weakness in the stimulus programmes in the long run, the Federal Reserve Chief Ben Bernake recently hinted that the Fed would be trimming down its quantitative easing programme.

This has prompted bond holders around the world to sell bonds, especially in emerging markets and return their monies to the US for better returns.
According to media in the past few weeks foreigners holding Sri Lankan bonds have also been selling, in line with the global trend.

According to Fitch ratings the most vulnerable nations of this trend would be the ones of with large external financing requirements in the form deficits, low foreign reserve positions and increased debt. The rating agency has indicated that Sri Lanka would be in for a rude shock if the bond selling by foreigners continued.

However, on the other hand the optimists have pointed out that though foreigners have been selling bonds, they have been buying Sri Lankan Treasury bills, at the same time. According to Standard Charted Bank, the rising inflation expectations have prompted foreign investors to shorten the investment durations. They also pointed out that the pressure on the rupee is not due to the selling of bonds by foreigners.

All in all, it appears that Sri Lanka’s economic front is currently in a more or less uncharted territory, where smart thinking and correct policies should be applied to come out of it unhurt. The ambitious growth targets set, high foreign borrowing, less tax revenue and foreign direct investment and falling export earnings will make it even more challenging.

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