China’s financial crisis:

‘No impact on Sri Lanka’

by Rohan Jayalal

The financial crisis in China will not have an adverse impact on the Sri Lankan economy due to our exports to China being negligible, Director and CEO, SMB Securities (Pvt) Ltd., Nadun Jayathilake told Sunday Observer Business.

The financial crisis has already become a cliché but what happened on Black Monday, August 24, cannot be taken lightly. Although the financial markets have somewhat recovered across the globe, hundreds of billions of dollars were wiped off from the world’s financial markets as the Chinese rout sent shares tumbling in Europe, Asia and the USA. Since countries such as the USA and Australia conduct trade with China in terms of dollars, the Sri Lankan economy is not so vulnerable.

However, China’s financial meltdown has affected its tea industry badly bringing down tea prices which only benefit the tea-importing countries. This has an adverse effect on Sri Lanka with tea prices in the world market dropping sharply.

Further, Sri Lanka is compelled to pay a higher price for imported goods such as electrical appliances and vehicles from China.

“However, the Colombo Stock Exchange remains unaffected despite the Chinese financial crisis since there are no Chinese investments in the share market.

The fluctuations in the Sri Lanka share market in the past were primarily due to domestic political instability. Therefore, we should not entertain undue fears about the functioning of our share market,” he said.

It is incumbent on the government to implement policies to stabilize the export sector to overcome the financial crisis as experienced by China and facilitate global competitiveness. Similarly, it will be prudent to explore new markets to replace Chinese imports in a manner favourable to Sri Lanka, Jayathilake said. According to Central Bank records, Sri Lanka exports mostly textiles and garments (40% of total exports) and tea (17%). Other exports include spices, gems, coconut products, rubber and fish.

Sri Lanka’s main export partners are the United States, United Kingdom, Germany, Belgium and Italy. Sri Lanka imports petroleum, textile fabrics, foodstuff, machinery and transportation equipment mainly from India, China, Iran and Singapore.

As any global financial crisis will have an effect on the Sri Lankan economy, policy, governance and social well-being, it is important to assess how exactly the shock waves from the crisis have travelled and what it means to Sri Lanka.

“Therefore, the future impact on the financial market has to be looked into carefully and a collective think tank body created. The Government should bring exporters, investors and experts to one table and motivate them. It is important that we recognise that it will be the exporters who can save Sri Lanka,” Jayathilake said.

“All developed countries have a deposit guarantee mechanism. It is important that we create a deposit guarantee system so that anyone who makes a deposit is guaranteed even if the bank collapses. The government will intervene and ensure that the depositor is paid. This should be done urgently,” he said.

The Central Bank and the relevant authorities should give assurances as it will be disastrous if there is a banking failure. Jayathilake said that in many developed countries there is a system where impaired assets are purchased and it is important that we should come up with a similar system.

“Sri Lanka needs to correct itself if we are to go forward in this era of globalisation and local industries using indigenous raw material should be encouraged to be competitive in the export market. The development of rural industries will see the improvement of the sector and more economic stability in the country despite the Chinese and global financial and economic crisis,” he said.

The industrial sector has been a significant contributor to the Gross Domestic Product (GDP) of the country. But this sector is predominantly confined to cities in the Western province. The government should also develop the other provinces.

If the global crisis continues Sri Lanka will not be able to totally avoid its consequences. However, if the correct steps are taken we can reduce its impact and develop the economy.