CB’s wise decisions helped face global economic crisis

Sri Lanka successfully faced the global economic crisis and the country is now on a growth path said the Governor of the Central Bank (CB) Ajith Nivard Cabraal. He was addressing the Key Persons’ Forum organised by the Federation of Chamber of Commerce and Industries in Sri Lanka (FCCISL) on “Lessons Learnt from the Global Financial Crisis”

We have delivered values to you and we are sustainable. Macroeconomic fundamentals are strong. Interest rates and inflation have declined. The three decade long war has ended and you have new space and great opportunities, Cabraal said.

Explaining the lessons learnt from the global financial crisis, Cabraal said, ‘you should strengthen yourself before the storm hits you. We did this and we carefully managed our banks and gave time and opportunities to make space to face any crisis. However, some of those decisions of the CB were not popular and the media criticised us. But we knew exactly what measures should be taken and which areas should be strengthened. When the crisis hit us we were ready to face it. The equilibrium changed but a new equilibrium came.

We told the public what we were going to do. It was strong and definite whether it is right or wrong and we took actions accordingly.We correctly read the signs of vulnerability even in the most advanced economies. Because we know that today all economies are inter linked and a crisis in any part of the world may have an impact on us. Like swine flu economic and financial crisis could spread quickly across the world. Therefore, we were watchful of what was happening. Two weeks before the Lehman Brothers collapsed CB withdrew US$ 900 million deposits.

CB had a long term view and planned for over five years. Focusing on short term position, you would lose. Our short term decisions were based on this long term view.

The CB did not ignore criticisms and bad pictures on decisions. When CB first raised US$ 500 million there were criticisms. However, the offer was 3.5 times over subscribed.

We had several plans to face situations like this for instance our plan A did not work at the Seylan Bank crisis. But we had Plan B and C. In a crisis you should have space to move.

In a macro economy there was a difficult period. The inflation was rising and was in double digits. Interest rates were high and foreign reserves were dwindling. We used policy instruments to create space.

Working closely with political authorities is also important and if not you will be in trouble. I discussed with the President and convinced him of the effectiveness and the results of policy decisions.

We have also proved that the CB is the lender of the last resort not only for local currency but also for foreign currencies as well. We did this during the crisis.

If foreign currency is draining out the CB should intervene. If you let the market function alone, the market will become more volatile.

Cabraal said, global problems need global responses and the assistance of the IMF and World Bank should extend to crisis hit countries as well as other countries.

This is similar to vaccinating healthy people in an epidemic. Though it was delayed the IMF Standby Agreement facility was a great help to Sri Lanka in facing the global financial crisis, he said.

(GW)