Global financial crisis - no direct impact on Lanka

By Lalin FERNANDOPULLE

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The global financial crisis will not have a direct impact on Sri Lanka's economy since the country has less involvement with financial institutions which have been hit by the crisis, said Director, Merchant Bank of Sri Lanka PLC, Dr. Ranjith Bandara.

He was addressing a seminar on the 'Global Credit Crisis' organised by the Merchant Bank of Sri Lanka recently.

Dr. Bandara said due to the global nature of the current crisis Sri Lanka will not be able to fully avoid the impact of the crisis.

The tourism industry and key export sectors such as textiles, tea and rubber will be affected by the global economic slow down.

The US and Euro Zone economic downturn will have a negative impact on the textile and garment exports.

Around 50 per cent of the country's garments were exported to the US and 40 per cent to the European Union last year.

Rising interest rates and inflationary pressure, the appreciation of the US dollar, the high public expenditure and a war budget will worsen the situation on Sri Lanka. Foreign investors will be compelled to withdraw investments if the crisis worsens.

"Sri Lanka's economy has been resilient to various external shocks but if there are no balanced policies and prudent management the global recession will have adverse consequences on the country", he said.

The loss of the global financial crisis is estimated at US$ 945 billion of which US$ 225 billion is due to outstanding loans and US$ 720 billion due to losses on securities.The world GDP growth projected by the IMF will slow down by 2 per pent or more and as a result the GDP per capita is expected to fall.

Dr. Bandara said though Asia is resilient to the crisis, trade expansion will reduce due to the decline in commodity prices and there will be a drop in export volumes to the US and Europe.

Developing rural industries and small and medium enterprises will help gain economic stability and face the global challenges. Rural industries make a significant contribution to the GDP of the country. Assistance for the SME sector will have a positive impact on the economy.

"With steps being taken by the government to strengthen the economy, bridge the regional disparity and strategic partnership with donor countries such as Iran the impact of the credit crunch could be low", he said.

Partner, PricewaterhouseCoopers Chartered Accountants, Sujeewa Muddalige said the premium on emerging market debt over the US Treasury has widened in the recent weeks, and a host of currencies has fallen against a resurgent US dollar.

Foreigners have sold more Asian stocks than they have bought this year, according to the Standard Chartered Bank. They have pulled out US$ 31 billion from South Korea, US$ 10 billion from Taiwan, US$ 8 billion from India and nearly US$ 4 billion from Thailand.

The cumulative fall in major stock markets since the crisis erupted in July this year is over 10 per cent which has erased a staggering US $ 4.5 trillion from global stock markets in four weeks.

Policy makers should identify the early warning of a future financial crisis, the critical gaps in the international regulatory and accounting architecture and rate complex securities that will provide information on risk to investors.

The global liquidity crisis is the prolonged economic expansion and abundance of leveraging in the western world.

George Soros, a leading investor said the current financial crisis is a result of 60 years of good time.

Muddalige said when the economies were doing well no one questioned. The people indulged in high consumerism with credit debts running into alarming amounts. A US citizen uses around 10-15 credit cards and the total debt increased four times since 1995-2005.

The global crisis is the manifestation of the collapse of the US credit and housing bubbles. Lending to poor quality (subprime) credit risks to finance home purchases has been stretched to the maximum compared to other segments of the credit markets. US housing prices increased by 52 per cent from 1992 to 2006.