Sri Lanka GDP to contract -9.2-pct in 2022, Maldives to grow 12.4-pct: World Bank
ECONOMYNEXT – Sri Lanka’s gross domestic product is expected to contract 9.2 percent in 2022 and a further 4.2 percent in 2023, a World Bank report said as the country suffers from the worst currency crisis in the history of its intermediate regime central bank.
The Maldives which has the best externally anchored monetary regime in South Asia is to grow 12.4 percent.
Sri Lanka’s rupee collapsed from 200 to 360 to the US dollar n 2022 after two years of money printing to suppress interest rates, leading to a loss of foreign reserves and sovereign default. Private credit has been smashed to stop forex shortages and help drive money to the deficit.
Sri Lanka has also been hit by import controls which are worsening the effect of the currency crisis on real economic activity.
“Countries have also resorted to restrictive measures to curb imports, but with potentially detrimental effects on the economic recovery,” the World Bank report said.
“Many households face severe economic hardship. Since earlier this year, a full-on economic crisis has unraveled in Sri Lanka, leading to wide spread shortages of essential items.”
Sri Lanka’s exports have recovered up to the second quarter of 2022, but lagged other countries in the region.
“Industrial production in real terms has risen, except in Sri Lanka” the report said.
Sri Lanka and Pakistan has the worst soft-pegged central banks in the region with aggressive open market operations and outright purchases of bonds to suppress rates despite having reserve collecting pegs.
In South Asia Maldives has to be best pegged exchange rate with the least activist monetary policy. The fairly firm peg has provided the greatest monetary stability to economic to operate and provided a social safety net for the people.
The International Monetary Fund also tolerates the peg in the Maldives, while flexible inflation targeting, probably the most dangerous intermediate regime every cooked up by Washington based Mercantilists is peddled to larger countries.
Maldives is expected to grow 12.4 percent in 2022 on the back of a 37.4 percent recovery in 2021. Maldives will also grow 8.2 percent in 2023. Maldives contracted steeply during the Covid crisis as the tourism sector was hit but the peg held.
Maldives’ Rufiyaa currency has fallen to only 15 to the US dollar from the original 4.70 to the US dollar rate (linked to the Indian rupee) money that South Asia had before separate money printing central banks were created.
Bhutan is still maintaining the rate, Nepal is also ahead of others in South Asia but both countries are vulnerable ‘monetary policy modernization’, which defies the impossible trinity of monetary policy objectives.
Both countries are also pegged to the Indian rupee and is exposed to Reserve Bank of India depreciation and policy errors, unlike Maldives which is anchored to the US Fed which has comparatively better policy. (Colombo/Oct07/2022)
