Continuing with unconventional policy package could have adverse effects on economy: Dr. Wignaraja

• Calls for refined strategy that would effectively deal with fiscal and external reserve issues

By Shabiya Ali Ahlam
The unconventional policy package adopted by the government to ease the pressures stemming from the pandemic did help Sri Lanka rid some problems but continuing to impose such measures could have adverse effects on the economy and even hamper growth, cautioned a senior economist, yesterday.

“We adopted an unconventional policy package to try to get us out of the problem of the pandemic and to some extent, it helped avert significant scarring and product support.

But keeping these measures in place, knowing the short term could be adverse for the fragile economy and even impede recovery,” warned London Overseas Development Institute Senior Research Associate Dr. Ganeshan Wignaraja.

Dr. Wignaraja, speaking at a webinar titled ‘COVID-19 and the Economy: Which Way Now For Sri Lanka?’, facilitated by the Pathfinder Foundation, pointed out that as Sri Lanka might be witnessing some “encouraging” signs that it is coming out of problems, which are pandemic-induced, the country must acknowledge that it is not entirely out of the woods, since emerging ahead are a number of risks.

To avoid future shocks, the senior economist asserted it is imperative to consider a “much more sustainable” long-term strategy, for which the government needs to consider fiscal stimulus, opening up trade with other nations via free trade agreements (FTAs) and leveraging services.

Sri Lanka’s poor state of the economy is not entirely due to the COVID-19 pandemic but even before the virus struck the island nation, just as it did the world, the macroeconomic conditions were not in an ideal state.

According to Dr. Wignaraja, when Sri Lanka faced the pandemic, it already had “quite weak” macroeconomic conditions, which meant the country’s fiscal stimulus to ride out the pandemic was less than one percent of GDP.
Stimulus packages in advanced economies were typically within the ranges of 5-10 percent, whereas certain developing countries fared better within their categories. However, Sri Lanka’s fiscal stimulus was well below even that of Bangladesh, which rolled out a package of 2.76 percent of GDP in 2020 and had planned for a fiscal stimulus of 1.71 percent of GDP in 2021.

To mitigate the hardships experienced by the people, Dr. Wignaraja stated that the need of the hour is a refined strategy that would effectively deal with fiscal and external reserve issues, while improving the climate for the private sector, so that the country can be pulled out from the ongoing crisis.