Real interest rates in Sri Lanka swing without clear objective: economist

Real interest rates in Sri Lanka have often swung from negative to positive without any clear direction or objective, thereby hardly making any tangible positive impact on domestic savings, Dr. Amarakoon Bandara, senior economic advisor to UNDP in Zimbabwe said in Colombo recently.

He said so while delivering a public lecture at the Central Bank of Sri Lanka last week, which was titled “Growth dynamics: What can we learn from success stories?”.

Drawing parallels between the movement of real interest rates in Singapore, South Korea and Sri Lanka, Dr. Bandara said,” Consistently positive real interest rates in both Singapore and South Korea have propelled private savings while public savings remained positive, but in Sri Lanka, real interest rates – a key concept of economics – has had no impact on domestic savings. Continued budget deficits, often over 6% of GDP has led to the erosion of national savings through public dis-saving”.

He further pointed out that Sri Lanka has been unable to use exchange rate as a tool to influence growth in exports. However, he said that this could be due to low productivity.

“The pressure on exchange rates could also be affected by the level of foreign reserves a country accumulates, especially through non-borrowed receipts such as current account balance and FDI flows. In the absence of such support, competitiveness is to be achieved only through exchange rate depreciation”, he observed.Referring to savings and capital formation in the Asian region, Dr Bandara said, “Liberal economic policies pursued by Singapore and South Korea had a big impact on their capital formation.

“The success of Sri Lanka liberalization policies introduced in 1978 was short-lived due to poor macro economic management down the years. However, Sri Lanka can still be part of the Asian growth story if it grabs the opportunity that lies before it now, and implements the right economic policies for 10-15 straight years, without taking a step forward and then backward because of centre-right and centre-left political ideologies”.