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Friday, 15 June 2012

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Ceylon Chamber of Commerce lauds govt's macroeconomic measures

The government introduced a package of courageous macroeconomic stabilization measures in February/March 2012. These were necessary to avert the balance of payments crisis that was looming on the horizon. While these measures were commendable, there is no room for complacency. The data for March/April compel continued caution and a careful monitoring of developments in the balance of payments, particularly the trade deficit.

Macroeconomic policy-making should now be informed by the lessons to be learnt from the sharp deterioration in the country's external account in 2011. Adverse global economic conditions, particularly the rise in oil prices, were an important causal factor. However, it is important to recognize that misaligned macroeconomic policies, particularly the exchange and interest rates, also contributed significantly to the sharp worsening of the trade and current account deficits of the balance of payments.

An important lesson to be learnt from last year's experience is that efforts to maintain an over-valued exchange rate and hold down interests rates simultaneously invariably result in a worsening of the trade deficit, pressure on the currency and a loss of reserves. A repetition of such a policy mix is likely to result in a balance of payments crisis which would have destructive effects both on businesses and the lives of the people of this country.

The government's use of all macroeconomic instruments (flexible exchange rate management, monetary tightening and fiscal measures) earlier this year offers the most promising path for addressing the imbalances that have emerged in the economy. There is now a strong case for staying the course on this approach until there is clear evidence that the balance of payments have achieved medium-term stability, the Ceylon Chamber of Commerce statement added.

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