Overcoming GEC :
Country to face challenges
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
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,”
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.