C. P. Chandrasekhar’s Blog

In a new turn to its advocacy of a conservative fiscal stance amidst a recession, the International Monetary Fund in the April 2022 edition of its “Global Financial Stability Report” has called for reining in bank credit to governments as a way of weakening the sovereign–bank nexus that was strengthened during the pandemic and ostensibly threatens bank stability. What is side-stepped is the real possibility that this additional thrust to limit government borrowing would only contribute to an intensification of the recession, adversely affecting bank profitability and increasing rather than reducing bank fragility. The IMF’s case seems to be driven by its…

The contours of the economic, political and humanitarian crises that Sri Lanka currently faces are now well known. With limited economic diversification, it has for long been an open economy that has found it difficult to earn the foreign exchange needed to finance its imports of goods and services. Structurally the Sri Lankan economy has remained highly export dependent even since gaining political independence in 1948, with the ratio of goods and services export to GDP touching almost 40 per cent in 2000 and standing at 30 per cent prior to the global financial crisis of 2008 and the Great…

When the world’s financial leaders met mid-April at Washington for the annual spring meetings of the International Monetary Fund and the World Bank, the mood was one of gloom. The world economy is in disarray, with world leaders clueless as to where it is headed or what can be done to prevent a possible collapse. In the April 2022 edition of its World Economic Outlook, the IMF has slashed its 2022 GDP growth forecast of six months ago by 1.3 percentage points to 3.6 per cent, and projects growth to remain below that level for the next two years. Inflation…

Injecting large amounts of cheap liquidity in the economic system has been result of increasing reliance on monetary policies post the Greenspan years. This has meant asset price inflation and accumulation of large amounts of legacy capital in the emerging and frontier markets. This legacy capital makes adoption of large expenditures on social-welfare difficult due to the risk of exit of capital. C. P. Chandrasekhar argues that this may be a worthwhile pain to endure for its benefits. Full discussion available at https://youtu.be/rI9Wt0WWP94

Countries in an economic rut require large fiscal expenditures to pull them out, but are stuck in a global financial framework that deepens inequalities. Recovery is difficult in the prevailing atmosphere of fiscal conservatism starting with the Greenspan years. Most debt meanwhile has been generated by advanced economies and China, as opposed to just 7% by developing countries. Full discussion available at https://youtu.be/rI9Wt0WWP94

Sri Lanka’s economy is sliding into chaos­ afflicted with multiple crises­, triggered by a steep fall in foreign exchange revenues during the Covid pandemic, a difficult to manage external debt servicing burden, a collapse in the volume of foreign exchange reserves, and finally the ripple effects of the war in Ukraine. Between January 2020 and mid-March reserves have fallen by as much as 70 per cent to around $2.4 billion. A collateral trend that compounds the crisis has been a sharp depreciation of the Sri Lankan rupee. At the end of the first week of March the central bank that…

Global inflation, the launch of a monetary tightening cycle in the US with increased interest rates, depreciating exchange rates and the fall out of the war in Ukraine, are forcing many countries to borrow their way out of balance of payments difficulties. This, however, is not the best time for that manoeuvre, given the uncertainty that overwhelms the global financial system. Yet, one country that seems less affected by these circumstances is India. Despite outflows of foreign capital from India’s financial markets in the first quarter of 2022, the stock market has not fared too badly. And the official assessment…

While the world remains preoccupied with the geopolitical and humanitarian fallout of the Russian invasion of Ukraine, its economic consequences are increasingly a matter for concern. Though the two countries at war account for less than two and one half per cent of the world’s population, it emerges that the damage to production within their boundaries and the suspension of their trading relationship with rest of the world threatens a crisis in multiple markets, not least in the markets for food and oil where shortage abound and prices are rising. This is are typical illustrations of the entangled fate of…

Following Russia’s irrational and devastating invasion of Ukraine, global energy markets have been in turmoil. Russia is the third largest producer of oil in the world and, more importantly, the world’s largest exporter of oil and gas and the second largest exporter of crude oil after Saudi Arabia. In December 2021, it exported 7.8 million barrels per day (mb/d), of which crude and condensate accounted for 5 mb/d, or 64 per cent. So, disruption of supplies from that country are bound to roil energy markets. The evidence is as expected. Prices of oil and natural gas that were recovering from…

In her budget speech 2022, the finance minister claimed that the centre pieces of the budgets for both the current financial year (2021-22) and the next (2022-23) are sharp increases in capital expenditure driven by enhanced public investment. That expenditure would not only strengthen infrastructure in seven areas (Roads, Railways, Airports, Ports, Mass Transport, Waterways, and Logistics Infrastructure), she argued, but have multiplier effects that would crowd in new private investment and raise the rate of growth. According to figures in the budget, capital expenditure did increase by 41 per cent from Rs. 4.3 lakh crore in 2020-21 (actuals) to…