US, financial turmoil - Lanka should be ready to face impact - Analysts

by Gamini WARUSHAMANA

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The US financial turmoil and the resultant global economic crisis would not have a direct impact on Sri Lanka’s economy. However, the indirect impact would be serious, economic analysts said. They said Sri Lanka should be ready to face it.

The United States of America last week said that the financial crisis in the country was serious and the country would face a long and painful recession. President George W. Bush called upon the Congress to pass a $ 700 billion Wall Street bail out proposal and added that the economy is in a crisis.

The financial turmoil in the US has spread across the world and all major economies are feeling the impact.

Dr. Sirimal Abeyratne of the Department of Economics, University of Colombo said that since our capital account is not open the crisis would not affect Sri Lanka directly. Also there are no Sri Lankan investments in these affected markets or financial institutions, he said.

However, the indirect impact of the crisis would be critical, he said. The recession would slump consumer spending in the US and this would affect our industries, especially the garment industry. The depreciating US dollar would also create problems and our export competitiveness will also weaken. However, this would affect our competitors as well. As the crisis has already hit other major economies in Europe our tea exports and tourism industry would also be affected, Dr. Abeyratne said.

Economic Analyst Lloyd Yapa said that the crisis has already affected Sri Lanka’s economy. The US financial crisis started last year.

The reason for the crisis is a slow down in the US economy. It is reflected by the depreciation of the US dollar. Countries such as China, Japan and the Middle East are now pulling out their investments.

They invest the money on commodities such as oil and food and as a result commodity prices have gone up. This is one of the reasons for high inflation in the country and we are already experiencing the impact of the crisis, he said. On the other hand this situation has widened our trade deficit.

The impact of the crisis would worsen in the future. Under the present situation, the government will have to provide more relief for the people and that would increase the budget deficit further.

This would push inflation further. As all countries are affected by the crisis, foreign aid would be reduced in the coming years and we have to find new sources, Yapa said.

Interest rates have gone up and as a result, foreign commercial borrowings, the new source of funding of the government, would be more costly in the future. After the Lehaman Brothers collapsed, the London Inter bank Offer Rate (LIBOR) jumped by over 3% and is now above 6%.