By Mandana Ismail Abeywickrema

Regardless of the many heroic statements made by members of the government and senior officials of the Central Bank on the Sri Lankan economy's immunity against the global financial crisis, the country is on a definite path towards economic turbulence.

Central Bank Governor Ajith Nivard Cabraal has been making statements that the global economic crisis would not have an impact on the Sri Lankan economy. Cabraal speaking at a recent seminar on the current global financial crisis and its implications to Sri Lanka, said that skillful partnership and planned management would definitely prove effective in gaining immunity for Sri Lanka with regard to the prevailing global financial crunch.

"On sensing the financial crunch, the Central Bank did take some precautions to handle the crisis, for instance, we maintained the rupee value and kept it stable, despite volatility in foreign remittances. As a result the rupee maintained its standard in the market," Cabraal had reportedly said.

Planned management

"The implementation of the 1% provision on all bank loans also proved effective in cases where customers were prone to deficit," Cabraal had said. He had then added that 'a skillful partnership and planned management' would definitely prove effective in gaining immunity for Sri Lanka with regard to the prevailing financial crunch.

While the Central Bank Governor harped on the country's immunity against the global economic crisis, a government minister was last week reported to have said Sri Lanka would be affected by the global financial crisis for at least another two to three years.

Tourism Minister Milinda Moragoda had said that amidst large job cuts in the US and India running into several millions and a deepening global recession, Sri Lanka would be affected by the global financial crisis for at least another two to three years.

"Experts have been wrong," Moragoda had said addressing an awards ceremony held just last week. He had also added that global giants such as AIG and Citi Bank who pioneered the insurance industry and defined banking to the world have failed along with the concept of capitalism.

Be that as it may, statements made in parliament and elsewhere on issues related to the country's economy all point to an economy that is on a nosedive. For the Central Bank Governor however nothing of the sort is happening.

Stop development projects

It was revealed last week that in a bid to cut costs and save funds, the government had issued a circular to all ministries, provincial councils and state departments to halt all development projects which were not bound by contracts, cancel all orders for purchases and not sign any agreement that would increase recurrent expenditure.

The JVP made this revelation last week at a news conference and also charged that the Central Bank was about to release funds from the foreign reserves to save the situation.

The Marxists said the government by issuing the circular had proven its inability to face the impending economic crisis.

According to the JVP, the circular had been issued by the Finance Ministry Secretary and has failed to specifically mention the kind of capital expenditure it had decided to limit. According to JVP Parliamentarian Sunil Handunnetti, this could be a move to halt all purchases made for the defence related sections as well.

Handunnetti also said that while the government issued this circular on the one hand to cut down/limit the expenditure in the state sector, it had placed an additional burden on the people by increasing taxes in the 2009 budget where a plethora of taxes have been introduced/increased for next year.

Also, the government debt bill, locally and internationally seem to be headed in only one direction - up.

Treasury owes Rs. 42 billion

Meanwhile, responding to a question raised by the UNP, the government last week told parliament that there was an outstanding payment of Rs. 42 billion to two state banks in the country from the Treasury.

UNP Parliamentarian Ravi Karunanayake had questioned about the amount of the outstanding loans to the two state banks, People's Bank and Bank of Ceylon from the Treasury.

Deputy Finance Minister Ranjith Siyambalapitiya had in response said that Rs.42 billion remained outstanding to the Bank of Ceylon and the People's Bank - a sum of Rs.29 billion and Rs. 13 billion to the Bank of Ceylon and the People' Bank respectively.

It was also revealed that this amount was an increase against the Rs. 23 billion reported last year. It was also revealed that the country's total foreign borrowings as of August 2008 are Rs. 1,385 billion, and local borrowings Rs. 1,916 billion.

Parliament was also informed by Siyambalapitiya that the Central Bank had printed money amounting to the value of Rs.22 billion this year and released it into circulation above the currency notes worth Rs.36 billion printed last year.

Karunanayake, who returned to the island after attending a meeting of Parliamentarians' Network in Paris where the key focal point was on the global financial crisis, speaking during the committee stage debate on the Trade, Marketing and Consumer Affairs Ministry said that according to projections of the World Bank and the International Monetary Fund (IMF) it would take about one and half to two years for countries to recover from the current global economic slump.

Plan own strategies

He added that the two leading financial institutions had requested policy makers of their member countries to plan their own strategies on overcoming this unprecedented financial downturn.

During his speech, criticising the "pundit at the Central Bank who had said Sri Lanka would not be affected by the global financial crisis," he questioned the measures taken by the Central Bank of Sri Lanka to cushion the country from this economic blow.

The crisis riddled Sri Lankan economy is set to take a beating due to the impact of the global economic crisis. According to financial analysts, the demand for its major export products such as garments, tea, rubber, coconut based items and agricultural products are already showing signs of a downturn. At the moment, tea is among the most affected and it has been pointed out that the country is experiencing a 35% drop in exports.

"The slowdown in the global economy will adversely impact South Asian exports and thus foreign earnings," said  World Bank Acting Chief Economist for the South Asia Region, Sadiq Ahmed in October. "Coupled with lower foreign capital flows and domestic investment, this will significantly reduce growth for South Asia."

Record growth

According to the World Bank, over the last 10 years, South Asia had witnessed a rapid and robust growth of more than six percent per annum, which had enabled millions of people to escape poverty. In 2006, the region recorded a growth rate of nine percent - the highest in the last 25 years.

However, in the last five years, price increases of global commodities, especially those of oil, metal, and food, took a toll on South Asia. Budget deficits widened and trade balances worsened. With this, growth softened and inflation reached double digits. Before the region could recover from the adverse impact of high commodity prices, the global financial crisis has come knocking. The cascading effects of these crises will present daunting policy challenges to South Asia.

The adverse impact has the potential to reverse elements of the impressive development gains that South Asia has achieved over the past decade and impede its progress towards achieving the Millennium Development Goals (MDGs).

Countering inflation with economic growth and focusing on investment oriented economic expansion are some of the ways pointed out by analysts as possible ways of overcoming some of the aspects of the global financial crisis.

The future of the Sri Lankan economy would depend heavily on the financial discipline adhered to by the government as well as the visionary thinking of its leaders. Burying their collective heads in the sand and pretending everything is hunky dory and that Sri Lanka is immune from the global financial turmoil is only going to lead to an economic tsunami of formidable proportions. Only this time it will happen after all the warning signals have been given.