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The Economist says SL 2nd most vulnerable to US monetary policies

08 Dec 2021

  • World renowned publication ranks SL behind only Argentina  
Sri Lanka has been ranked as the second most vulnerable nation to American Monetary policy behind only Argentina, according to the recently published Vulnerability to American Monetary Policy Index by The Economist.  This Vulnerability to American Monetary Policy Index ranks 40 selected countries based on five indicators; current account balance, gross public debt, foreign exchange reserves, consumer prices, and external debt.  The Economist is a world renowned international weekly newspaper based in London. According to the index, Sri Lanka has the second highest vulnerability index score, with a score of 31 out of 40 while Argentina had a score of 33 out of 40. When considering the five indicators used by the index, Sri Lanka had the highest score in relation to the gross public debt and external debt indicators and also had the second highest score with regard to the current account balance indicator.  With the spread of the new Covid-19 variant, labelled Omicron, financial markets around the global saw significant selling during end November as investors viewed this development as a signal that global recovery would be delayed. Increased fears of inflation in the US has resulted in a tighter American monetary policy and recently US Federal Reserve Chairman Jerome Powell suggested that the Central Bank might accelerate its plan to taper its asset purchases. According to The Economist, due to the critical role of the dollar and US Treasury bonds in the global financial system, a more hawkish Fed is often associated with declining global risk appetite. Capital flows towards emerging markets tend to ebb; the dollar strengthens, which, because of the greenback’s role in invoicing, reduces trade flows. Explaining further, The Economist stated: “The world has faced the combined pressure of hawkish American policy and a stumbling China before. In the mid 2010s fragile emerging markets were squeezed by a rising dollar, as the Fed withdrew the monetary support provided during the global financial crisis, while a badly managed round of financial market liberalisation and credit tightening triggered a slump in China. Growth across emerging markets, excluding China, sagged from 5.3% in 2011 to just 3.2% in 2015.” The squeeze this time is almost certain to be worse. That is in part because the Fed is expected to tighten policy more quickly than it did in the 2010s, when a weak recovery and stubbornly low inflation forced it to go slow. Then more than two-and-a-half years elapsed between the Fed’s announcement of its intention to reduce its asset purchases and the first rise in its policy rate. This time, by contrast, the 12 months following the Fed’s announcement of its plan to begin tapering in November are likely to involve a complete halt to bond-buying and, according to market pricing, at least two interest rate rises.


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