Global Economic Crisis and Sri Lanka

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Comments on The Present Global Financial Crisis and Sri Lankan Economy by Mr Ajith Nivard Cabraal, Governor of the Central Bank of Sri Lanka 10 October 2008

1. The Global Economy is in Turmoil.  The ongoing financial crisis originated as a result of the subprime mortgage crisis (SMC), erupted in mid 2007. The SMC erupted due to the bursting of the US Housing Bubble and high default rates on “Sub Prime Mortgages”, beginning 2006.  The major cause for this financial crisis was the reckless providing of loans by financial institutions, particularly to the housing sector, without proper supervision, and the resulting eventual bankruptcy of such financial institutions. In other words, this is a turmoil that had been caused by the grant of loans to “bad creditors”, considering them as “good creditors”.  The SMC became more apparent during 2007 and 2008, and has now resulted in contracted liquidity in the global credit markets and banking system. 1

2. What is the impact on the Sri Lankan Economy?  Fortunately, Sri Lanka has only a minor relationship with the financial institutions that have got into difficulties. Because of this reason, there will not be a significant direct impact on our economy.  In addition, the shift of economic policy of the present government, which has given pride of place to the domestic economy, has also prevented any kind of large scale impact, arising from the international turmoil. For example, Sri Lanka’s “Api Wavamu – Rata Nagamu” policy has helped the country to withstand against the world food crisis. This has been achieved in the midst on many countries, including Egypt, Haiti, Ivory Coast and Somalia, are having “Food Riots”.

3. It is clear that we have been able to face the recent shocks successfully.  Sri Lanka was able to confront the oil price shock with appropriate, prudent and timely measures. The decision to 2

pass-through the oil prices to final consumers was one of the toughest but very prudent decisions...
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