Restraint and Prudence: An Amber Light for the Economy

Global and domestic economic developments call for vigilant and cautious policy-making at this time. The Eurozone crisis; the fragile recovery in the US; the economic slowdown in China; the twin deficits (budget and current account) and a lack of economic reform in India; the political turmoil in the Arab world; and sanctions against Iran mean that the external economic environment is characterized by elevated uncertainty and risks. These negative factors are mitigated to some extent by a softening of oil prices as a result of a slowing of global economic activity. However, policy-making needs to take cognizance of the very real risk of the slow-down in Sri Lanka’s key export and tourism markets outweighing the benefits of lower oil prices. Consequently, the authorities’ forecasts of a trade deficit of $9.2 billion and an overall balance of payments surplus of $1.2 billion this year could well come under considerable pressure. It is also important to recognize that it is highly risky to count on borrowing oneself out of trouble.