Overcoming GEC :

Country to face challenges

Gayan Kanchana

For the country’s economic direction any policy response to the crisis must distinguish between long term, short term and medium term measures all within a framework of a long term vision, Executive Director, Institute of Policy Studies of Sri Lanka Dr. Saman Kelegama said.

He was speaking on “Facing the global economic downturn: Challenges and opportunities at the sixth Annual General Meeting of the Sri Lanka Ceramic Council (SLACC) held in Colombo recently.

The world financial system is now undergoing a global economic crisis of staggering proportions. The root cause of the Global Economic Crisis (GEC) was the United States mortgage market selling sub-prime mortgages to large numbers of consumers with inadequate incomes.

These mortgages were bundled into securitized paper investments, and sold by Wall Street to major financial institutions across the globe,” Kelegama said.

Dr. Kelegama explained that the country will face huge challenges to overcome the GEC, such as managing the exchange rate while protecting the external reserves to meet debt service obligations and other payments. “Maintaining a healthy growth in exports, when global demand is declining, is also a challenge.

Sri Lanka will have to look at new markets,” he said.

It will be tough for the country to borrow from outside, since global liquidity would be much tighter, therefore, a rollover risk of short term debt would arise, due to the global credit crunch and, if available, the cost would be much higher.

The country would also face the challenge of attracting foreign borrowings during a time of low market liquidity in the international markets, to maintain sufficient levels. Despite the optimism that has been expressed with regards to Sri Lanka limited vulnerability to towards the crisis.

It was made clear that such optimism is misplaced given the continued evolution of the crisis and the prevailing uncertain economic climate.

In this context it is essential that all countries take stock of the realized and potential impacts that may manifest.

The importance of tailoring solutions to each country’s specific conditions was highlighted, emphasizing the inapplicability of “cookie cutter” solutions based on the response of other countries.

The crisis has also shed light on windows of opportunity and positives for instance the reduction in commodity prices, the opportunity and rationale for reform in key areas such as fiscal and monetary policy, factor markets and reforms to safety nets.