Brexit issues could have unsettling impact on Sri Lanka – NEC chief


By Hiran H. Senewiratne

Brexit issues may have significant impact on emerging and frontier financial markets like Sri Lanka, National Economic Council (NEC) Secretary General and Chief Economist Prof Lalith Samarakoon said at a recent forum.

"The Bank of England had recently warned that a disorderly Brexit will have a significant down-turn in the British economy. Therefore, the sterling pound could also be expected to depreciate. To combat the situation Bank of England will increase its interest rates to stabilize the economy, Samarakoon said at the 2019 Economic Outlook Forum held at the Galadari last week.

He said that the departure of Italy from the single currency (EUR) would significantly weaken the Eurozone and as a counter measure the EU may increase interest rates to guard their currency from depreciation, which would affect Sri Lanka in some way.

'Italy is under pressure from the European Commission to reduce its spending and balance the budget. If Italy raises its spending it will raise its already high debt pile. Currently its debt pile is equal to 130 percent of GDP. This situation apparently affects the European financial markets and volatility and will have a ripple effect on emerging and frontier markets, he said.

"Under these circumstances Sri Lanka's billions worth dollar denominated sovereign bonds may be hit by aforementioned financial market volatility, Prof. Samarakoon said.

He said that Sri Lanka's budget deficit and the current account deficit, combined with lower growth, would not augur well for our currency. This is the reason for the acceleration of the depreciation of the rupee.

'The budget deficit and the current account deficit are fundamental structural issues that need to be solved. An economic policy, which is growth, investment and incentive oriented has to be put forth to address the issue, Samarakoon explained.

'Further, Sri Lanka has to increase its GDP growth to be more than 4 to 5 percent in order to overcome structural problems, he added.

Central Bank Senior Deputy Governor Dr Nandalal Weerasinghe said that Sri Lanka, being a middle income country, could not access low interest lending rates and we have to borrow funds from overseas markets which could prove costly.

'Sri Lanka could grow by 6 percent and keep the inflation level below five percent. This could be done by increasing exports and foreign currency earnings. This would enable to stabilize the rupee against the dollar from medium to long term perspectives, he said.

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