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Global
The turbulence unleashed by the global financial crisis is unprecedented. Macro economic conditions have never been as unfavourable in the recent past as they are now with falling investor and consumer confidence and a widespread ‘state of alert’. The International Labour Organisation has predicted that 20 Mn jobs will be lost by the end of 2009 and a ‘global negative growth’ is forecast for the first time in many years.
Companies once considered the epitome of stability have crashed sending ripples of fear through many financial systems. Some of the big global financial institutions have seen their share prices plunge drastically.
The global crisis is likely to create a number of adverse consequences for
Sri Lanka over the next two years:
- Reduced demand for exports
- A fall in export prices
- Lower levels of foreign remittances
- Lower levels of Foreign Direct Investment (FDI)
- Lower foreign reserves
- High inflation and high interest rates
Local
2008 was yet again characterised by
high inflation, high interest rates and high expenditure on the North-East war. The country’s gross official reserves which were at US$ 3,424.4 Mn in
August 2008 had come down to
US$ 1,753.0 Mn by end of 2008.
This forced the Central Bank to permit a limited depreciation of the
Sri Lankan Rupee (LKR). LKR depreciated by 3.96% against US$ closing at
Rs. 112.80 by the end of 2008.
The Central Bank took steps to inject more liquidity into the market through a reduction of the Statutory Reserve Requirement and by providing a reverse repo facility to commercial banks and primary dealers. Foreign funds however, will come at a price and the Government will be forced to fall back on domestic borrowings, which again is available only at high rates. Although inflation has slowed down, interest rates are expected to remain high in the short term.
On the positive side, the Eastern province has now been integrated with the rest of the economy with the prospect that the full potential of that province can now be exploited. The North is also likely to follow this model and the opening up of these two provinces will create new opportunities for the local entrepreneur. |
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