External, fiscal fronts vulnerabilities to dampen 2022 growth prospects - CB | Sunday Observer

External, fiscal fronts vulnerabilities to dampen 2022 growth prospects - CB

8 May, 2022

The economy is expected to grow modestly in the near term as the economy is to be reset with a debt restructuring program and long overdue structural reforms alongside an economic adjustment program supported by the IMF which is expected to facilitate the economy to gather momentum in the long term, according to the 2021 Annual Report of the Central Bank. The build-up of macro-economic instability of  the economy, stemming from heightened vulnerabilities on the external and fiscal fronts, rising social unrest and political instability and elevated commodity prices globally and domestically are  expected to dampen 2022 growth prospects significantly   and have lingering effects in the immediate future leading to a slowdown in growth, the report stated.

It noted economic activity is likely to slow down amid the announcement of a suspension of external debt servicing by the government for an interim period and commitment to a  debt restructuring program. However, it notes commissioning of prudential macro economic policies aimed at stabilising the economy coupled with an IMF engagement, improved monetary and fiscal policy coordination  and envisaged SOE reforms is expected to restore the pace of growth over the medium term.

The aggressive tightening of monetary policy is expected to contain excessive inflationary pressure in the economy thereby anchoring inflationary expectations which is vital to establish a conducive environment for investments.

However, in the short run a notable rise in interest rates would discourage lending and hamper economic growth but would help address interest rate anomalies and pressure on the exchange rate to a certain extent, thereby attracting productive investments in the medium to long term.

The report however notes that the tightened monetary policy would be instrumental in stabilising the external value of the domestic currency facilitating the influx of foreign exchange.

Earnings from exports are expected to moderate in 2022 before strengthening in the period ahead with envisaged recovery in the global demand, favorable exchange rates and the policies to improve the tradable sector while demand for imports is expected to dampen due to tight monetary policy, difficulty in financing imports and higher global commodity prices.

Global economic growth is estimated at 6.1 percent in 2021 compared to a contraction of 3.1 percent in 2020 according to the World Economic Outlook in the International Monetary Fund released last month.