The World Bank (WB) is urging the Sri Lankan government to safeguard its foreign reserves, improve its fiscal situation, strengthen its financial sector and address long run structural issues in order to weather the global financial crisis.
Speaking at a European Chamber of Commerce of Sri Lanka (ECCSL) forum on the global financial crisis and the challenges ahead, WB Country Director Ms. Naoko Ishii said Sri Lanka should bring more value addition and move towards a knowledge based economy. She added that the challenges for developing countries include a lower demand for exports and much reduced access to capital from international financial markets, a situation she described as 'worrisome.'
Further, the WB expects a sharp decline in capital flows to developing countries. Ms. Ishii added that the world trade was set to contract in 2009 for the first time since 1982.
Assistant Governor of the Central Bank (CB) Dr. Uthum Herat said the global financial crisis will affect the government's access to foreign capital and that the world recession will affect exports, tourism, remittances and foreign direct investment which makes the government's task that much more difficult. Dr. Herat said reforms in the financial sector will continue. The CB is expected to focus on good governance, capital, risk mitigation and liquidity which by and large, has been good according to Dr. Herat. He added that the coming year will be difficult and the government will move to mitigate adverse external impacts. Monetary policy will also be less stringent.
Regional lead economist for South Asia at the Asian Development Bank (ADB) Narhari Rao said Asian financial markets have been much less affected because they are less sophisticated and engaged in less sophisticated financial products. He described the overall situation of Asian banks as being fundamentally strong even though the deterioration in the overall economic climate has adversely affected commercial banks. Banks are provisioning more for expected loan losses and governments have had to inject money into banks.
Monetary authorities must do everything to support financial systems given the lack of confidence. If a bank fails, Mr. Rao warned that it could have a domino effect. However, he said money cannot be infused unless financial institutions are made more transparent. He stressed that the Central Banks and regulatory authorities need to ensure that domestic banks properly classify their loans and set aside money for provisions.
However, Asia is integrated through trade with the rest of the world and the risks to the real economy are causing severe problems in Asia, Mr. Rao said, especially due to the fact that the Asian model is highly export dependent. Aggressive export expansion and building up current account surpluses and high reserves may not be sustainable in the long run. He expects a reversal of the crisis over the next two to three years in the region.
Director General of the Securities and Exchange Commission (SEC) Channa De Silva said there must be a deposit guarantee scheme, a reduction in interest rates and an injection of liquidity. He said the oil hedging agreements have made the situation worse for the CB and that after the hedging contracts end, Sri Lanka can benefit from lower oil prices.
Mr. De Silva said Sri Lanka has a history of failed finance companies, the latest being Sakvithi and the Golden Key Credit Card Company scandals. He said it is disappointing that the Inland Revenue Department and the CB did not realize they were collectng billions of rupees in deposits. He also called for a strengthening of several institutions such as the SEC, the Insurance Board of Sri Lanka, the CB and the Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB). Mr. De Silva added that he has tremendous confidence in the Sri Lankan economy and if the war is brought to an end, the stock markets will gallop.
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