Thursday December 5, 2019 00:55:54
ECONOMYNEXT – Sri Lanka’s economy could be destabilized if a fiscal stimulus in the form of a tax cuts turns out to be unsustainable, the World Bank Chief Economist for South Asia, Hans Timmer said.
“In Sri Lanka, going forward,
there’s objectively a reason for fiscal stimulus but there’s not enough space
to actually do it,” Timmer said, speaking at a public lecture organized by
the Central Bank of Sri Lanka on the effects of slowing global growth in South
“Then you have to be very careful
to balance that. Because if you over-stimulate when you don’t have the room,
instead of stabilizing economy, you could destabilize the economy,” he
Sri Lanka’s new cabinet under President
Gotabaya Rajapaksa has announced a series of tax cuts, as economic growth fell
to 1.6 percent in the second quarter of 2018, in the wake of currency collapse
in 2018, triggered by liquidity injections despite tight fiscal policy.
The 2018 currency collapse came on top
of a 2015/2016 currency collapse, triggered by liquidity injections by the
central bank as the budget deficit deteriorated.
Timmer said if countries want to solve
structural problems which impede growth, it is better to focus on monetary
stimulus while such problems are addressed, and if there is only a temporary
slowdown, fiscal stimulus is preferred.
With falling revenues and slower than
expected growth, Sri Lanka’s 2019 budget deficit is already estimated to have
widened to 7 percent of gross domestic product.
With little fiscal space, countries like
Sri Lanka will find it difficult to spur growth sustainably with fiscal
stimulus, he said.
“You need to build confidence among
investors, focus on sources of potential high growth and focus on areas of
opportunities for exports, but for some reason, these opportunities have not
been taken,” Timmer said.
He said Sri Lanka needed to tap into
underutilized resources, such as the informal sector, women, and create the
right policies to allow investors to harness these labour pools and increase
confidence in the market.