SL ‘relatively unscathed’ by QE tapering : Top economist
View(s):Sri Lanka came out ‘relatively unscathed’ following the first rounds of tapering of the US-based Federal Reserve’s Quantitative Easing (QE) programme, according to Dr. Indrajit Coomaraswamy, a top economist and former Director of Economic Affairs at the Commonwealth Secretariat. The country has only experienced a little bit of money going out as well as some shifting from bonds to shorter term, one-year treasury bills as a result of QE tapering.
Put in place as a consequence of the global financial crisis, QE is an “unorthodox” economic policy whereby the Fed buys member bank’s assets, indirectly adding money to the US economy. By the middle of 2013, the Fed started tapering off its monthly purchases, from $ 85 billion, to its present $ 65 billion, with the QE tapering programme expected to end over the course of 2014.
Dr. Coomaraswamy made these comments as part of a presentation, titled the “Global impact of the tapering of Quantitative Easing and a preview of Janet Yellen as the new Fed Chairman”, which was recently organised by the Sri Lanka Italy Business Council of the Ceylon Chamber of Commerce.
Elaborating further, Dr. Coomaraswamy also added that countries like India were most ‘severely’ affected by QE tapering due to large current accounts. And while most countries took the first round of QE tapering ‘in their stride’, the second round saw countries such as South Africa, Argentina and Turkey coming under pressure, a result of ‘jumpiness’, or nervousness, in the markets. He further opined that where this policy could be seriously impacted would be as a result of a major default in emerging markets. E.g. If a Thai banking default ensues, as is currently being speculated, it could kick off a global contagion.
Dr. Coomaraswamy also noted that the reasoning behind QE tapering involved consistent positive data coming out about the US economy, e.g. the housing market showing an upturn, lower inflation, etc. He also commented that the only thing he could see that could negatively impact this scenario was the divisive US politics regime and how that impacted the US debt ceiling votes.
Meanwhile, Dr. Coomaraswamy also accepted Sri Lanka’s need to source funds from global markets, stating, “As a lower middle economy, we have no option but to fund our growth through capital markets rather than waiting for never-ever development money”. Since 2009, the country has held five bond issues totalling $ 4 billion. Further, he also noted that local authorities had prepared for some shocks to the system, with the most recent round of funding being maintained in reserve.
Additionally, Dr. Coomaraswamy also shared his personal view that the US government was forced to let Lehman Brothers fail as there was a need for a collapse of Lehman’s magnitude to gather political will for a bailout of the financial system. He also commented that, because former Fed chairman Ben Bernanke’s PhD thesis had been related to the Great Depression, he understood that he had to inflate the economy via zero interest rates and massive asset purchase programmes. Following all this, the Fed had also clearly stated that it would shift its accommodative monetary stance when unemployment hit a 6.5 per cent target. And now its forward guidance had shifted to the inflation rate as its key indicator. (JH)