US-EU recession would hit Sri Lanka -Dr. Sirimal Aberathne
Dr. Sirimal Aberathne of the Department of Economics, University of
Colombo said that the adverse impact of the EU recession on the Sri
Lankan economy would be widespread and Sri Lanka will have to downgrade
its anticipated growth targets.
 Growth forecasts for the Euro Zone have been revised downward in the
backdrop of the worsening sovereign debt crisis in the region. Most
countries in the Euro Zone began to violate their policy coordination
through increased borrowings. When the private sector becomes weaker,
the government has to be stronger to mitigate the adverse impact of
economic recessions.
Yet the theory does not seem to have worked that well, as investor
confidence deteriorated and growth slowed down re-enforcing each side.
The attempts of the European Central Bank to prevent the forthcoming
recession have so far been ineffective. And, above all it is a new
dimension of business cycles as Euro Zone is an “alliance” of countries,
which established a single currency (Euro) after agreeing to work
together.
They will have to integrate even more by surrendering policy
autonomy. If not the challenge is how to defend the Euro, which would
come under increasing pressure for disintegration.
Euro recession, apparently quickly spread to US because the EU and
the US are integrated intensively through trade, investment and
financial flows much more than the other regions in the world.
For that matter the two regions share a large part of the world
income and consumption.
Developing countries such as Sri Lanka are integrated with the US and
EU through trade, investment and tourism. Since Sri Lanka does not have
a deeper financial integration, the US-EU recession would affect the
country mainly through the real sector.
Sri Lanka’s exports share to US and EU account for nearly 60 percent
of total exports.
As the recession could affect many other countries which are
integrated to US and EU, and which are having economic relations with Sr
Lanka, the adverse impact of the EU recession on the Sri Lankan economy
would be widespread, he said.
Is 8% growth target a realistic or do we need a downward revision?
Dr. Aberathne said that Sri Lanka will have to downgrade its
anticipated growth targets. Sri Lanka’s growth outlook in the recent
past has moved in a peculiar path.
As a “small economy”, Sri Lanka’s growth must be reflected in its
trade performance.
Yet during the past few years, Sri Lankan trade volume as a
percentage of GDP has declined sharply, despite rapid economic growth.
Moreover, Sri Lanka’s export share to US has declined already, while
its decline has been replaced by rising share of exports to EU.
With recession, the rising trade share of the EU would be under
pressure. In addition, Sri Lanka’s trade diversification has not been
satisfactory, so that our exports to the rest of the world grew slowly.
Against this backdrop, the negative impact of a possible Euro
recession is likely to be dramatic.
Coincidently, the changes in development strategies and the role of
the government during the past few years were, helpful in mitigating the
medium-term adverse impact of the US recession.
Yet, the sharp changes in the policy regime, as clearly anticipated
at the time, raised the important issues of their long-term
sustainability and macroeconomic costs which the country is facing right
now.
Therefore, if the EU crisis deepens Sri Lanka could have a double
blow, one external and the other internal, he said.
GW
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