• SL’s vulnerability only lower to Argentina whose score is 33 out of 40, while SL’s score is 31
• Argentina defaulted on its external debt for the ninth time last year and the second time in 20 years
• Markets bet on early end to bond buying and at least two rate hikes by the Fed next year 

The Economist ranked the Sri Lankan economy among the most vulnerable nations to the change in monetary policy by the United States (US) Federal Reserve next year, a move which could tighten liquidity conditions for emerging markets and the broader developing world. 

Based on a score assigned to five most susceptible economic indicators of nations to a Fed policy pivot next year, Sri Lanka was ranked second among 20 nations, only under Argentina, for the highest combined vulnerability score. 

Argentina defaulted on its external debt for the ninth time last year and the second time in 20 years. 

The US Fed Chair Jerome Powell last week indicated that they would review the current pace of unwinding of bond purchasing programme to quicken its pace when the Federal Open Market Committee meets next week. 

The markets are expecting at least two or three times hike in policy rates next year to ease the price pressures, which didn’t prove to be transitory as expected by the Fed. 

Rate hikes by the US Fed could complicate the recovery of the pandemic-struck emerging and Asian market economies as they could reverse the direction of capital flows. 

While the countries with larger reserve buffers and those with positive current account balances in their Balance of Payment (BoP) could avert economic pain, others with razor thin foreign reserve buffers such as Sri Lanka could fall victim to such a phenomenon, as they are unable to strengthen themselves against such a shock. 

This is one of the reasons why the US Fed, the de-facto central bank to the world, is cautious in upending its monetary policy faster as it has a broader mandate to avoid the potential fallout of such an action on the emerging and developing economies as happened during 2013, which widely came to be known as the ‘taper tantrum,’ during the tenure of the then Fed Chair, Ben Bernanke. 

Using data from the International Monetary Fund (IMF), the World Bank and the Bank for International Settlements, The Economist assigned scores of 0 to 40 to reflect the lowest to the highest vulnerability of an economy on their identified economic indicators.  Those economic indicators are: current account balance of the BoP, gross public debt, foreign exchange reserves, consumer prices and external debt. 

Sri Lanka recorded a combined score of 31, slightly below Argentina’s score of 33. 

Among the five other most vulnerable countries are Egypt, Pakistan and Brazil with respective scores of 28, 27 and 24. 

The five countries with the lowest vulnerability scores are Saudi Arabia, Russia, Vietnam, Thailand and South Korea, listed in the order of least vulnerability score. 

Sri Lanka’s weakest spots are found in two criteria—gross public debt measured as a percentage of the gross domestic product and the external debt measured as a share of external reserves with respective scores at close to their highest level of vulnerability at 39 and 38. 

Sri Lanka’s gross public debt stands at 104 percent of the size of its economy and the reserves fell to post war low of US$ 2.3 billion in October, adequate for less than half the foreign currency debt obligations falling due during the next 12 months. 

Sri Lankan authorities however have repeatedly indicated their inclination to deal with the debt issue on their own and insisted they would not seek IMF assistance.

Speaking on Monday at the Sri Lanka Economic Summit 2021, the country’s largest private sector gathering, the Central Bank Governor, Ajith Nivard Cabraal projected optimism over the economy and the ability to ride out the worst of the debt problem in the near term through domestically designed strategies. 

However, a section of economists are of the view that seeking IMF assistance is the only option Sri Lanka currently has to manage its external debt issue and other economic ills.