Global meltdown no major crisis for Lanka, says CB

  • Officials keep 24-hour vigil on the situation; economists say indirect impact likely
By Natasha Gunaratne

As the global financial crisis continues and markets around the world tumble, Sri Lanka’s Central Bank has assured the banking industry that it will act if necessary to mitigate any effects of the crisis.
Governor Ajith Nivard Cabraal told The Sunday Times the Bank was studying the crisis closely with officials keeping a 24-hour watch on the markets while meetings were held everyday to review the situation.

There was no immediate crisis here although the market appeared to be concerned about liquidity, the Governor said adding that the Bank would step in if a crisis does occur in the future.

Mr. Cabraal said that in the wake of the global crisis, the market here had seen some reduction in lending but the impact had been minimal.

He said he did not attend the World Bank (WB) annual sessions in Washington D.C. last week as he felt his presence here was more important at a time when the world financial markets were collapsing. Deputy Governor Ranee Jayamaha attended the WB meeting.Commercial Bank’s Global Markets Chief Dudeepa Ratwatte said Sri Lankan banks were fortunate not to have had exposure to the banks that collapsed in the United States and Europe.

"In that sense, we have been lucky but liquidity is drying up locally because the global impact is having an effect here. The CB is maintaining a dialogue with us and giving some sort of comfort although there is no such crisis. The CB says it will provide liquidity. It can do it by slashing the reserve ratio," he said.
Mr. Cabraal said the CB reduced the Statutory Reserve Requirement (SRR) on all rupee deposit liabilities of commercial banks by 75 basis points to 9.25% from October 17. "This was a measure we took to make sure we were on top of the situation," he said.A CB statement said this step was taken to inject more liquidity to the domestic financial market and enable it to effectively face any liquidity constraint that may arise as a result of the current turbulence in the global financial markets.

As a result of this move, the CB said the financial market would be able to access additional liquidity of around Rs. 7.5 billion.

Economist Sirimal Abeyratne said the crisis in the US directly affected not only the financial markets in other countries but stock markets as well. “When stock prices go down in US companies, stock prices in other companies related to them also go down in other markets and vice versa.”

Governor Ajith Nivard Cabraal

Dr. Abeyratne said bonds issued by US financial companies were bought and held by many individual firms, banks and central banks around the world. “Sri Lanka does not have that kind of relationship with the US financial markets because companies here do not hold assets in US companies.

“However, Sri Lanka should expect the impact of the current global crisis through international trade. The financial collapse particularly in the US and the EU affects the production sector, aggregate demand declines and consumption and investment also decrease. More than 90% of the garments exports from Sri Lanka go to the US and EU markets,” Dr. Abeyratne said.

He said there could also be an indirect effect as the problem was spreading to Russia, a big market for Sri Lanka’s tea exports and India, a big trading partner, and even West Asia and East Asia.

He said he had heard from sources that during the first two weeks of October, the world shipping volume had decreased by 50% because banks were finding it difficult to issue Letters of Credit (LCs).
Bankers' Association General Secretary Upali de Silva said he believed the global financial crisis would hardly have any effect on the local banking sector although it could indirectly affect the export sector which gets financing from the banking sector.

However, he said this had not happened so far. Joint Apparel Association Forum (JAAF) chairman Ajith Dias said the financial crisis would have some repercussions not only on garment exports but the entire export market in general.

However, he said the sector was yet to notice any negative impact. "At the moment, we are marketing for the first quarter of next year and in any case, our American business has not come down. But there could be pressure on prices. The crisis will have some effect somewhere but we have to wait and see,” he said.

Economist Nimal Sanderatne presented a different view. He said it was difficult to predict when Sri Lanka’s exports would start to see a decline, but it would not take long because there had already been a 1.2% reduction in US retail sales and this would only gain momentum.

"What is likely to happen is those who are placing the orders will now cut down their orders anticipating a reduction in sales,” Dr. Sanderatne said.

He also noted that the garment export sector growth has declined this year but it had nothing to do with the current global financial meltdown. "The industry is in bad shape and the crisis is going to add
to it."

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