The Financial Crisis and it’s Impact on Sri Lanka

Last week, I was at a workshop on the financial crisis and it’s impact on South Asian economies put together by LYSA – Liberal Youth of South Asia – a network of South Asian youth organizations based on liberal values.

The workshop was mainly handled by Dipankar Sengupta, professor of economics at the Jammu University, an interesting chap with wide interests. From my conversations with him I gathered he’s mildly sympathetic to the Austrian School and the work of Hayek, et al.

Dr. Harsha De Silva, also made a guest appearance for a session on the global recession and South Asia mainly focusing on the plight of Sri Lanka. His presentation was surprisingly fun, something I didn’t expect from him.

The following are some broad points by the two speakers from my notes and by no means complete and comprehensive.

What really happened

The narrative of what exactly happened in the U.S. mortgage market which led to the financial crisis and what caused those problems are very relevant. However, because I’m too lazy to put it down, I will post a couple of links which I think captures the (classical) liberal narrative of what happened in the financial crisis and largely conforms to the narrative given by Prof. Sengupta.

The first is a video on youtube and second is this article by Lawrence White at Cato unbound.

The Impact on the rest of the world

According to Sengupta, the reason for the impact of the financial crisis on the rest of the world, particularly in Asia, is pretty simple. U.S. and Europe is the largest export market for most Asian economies, when the economy in those countries goes into recession, demand for foreign exports fall, when exports fall demand for labor in export industries also fall, resulting in adverse economic conditions in exporting countries.
Impact on Sri Lanka

Adding on, Harsha de Silva made the following points.

  • Sri Lanka is only now beginning to feel the brunt of the financial crisis, its impact on top of our already mismanaged macroeconomic conditions will hurt us even more.- Sri Lanka for example, refused to depreciate the currency even when other countries in South Asia, such as India, did so. (see LBO’s recent fussbudet Column).
    – We have had a problem of high inflation for a very long time
  • Financial crisis will impact Sri Lanka in number of distinct ways.Middle-eastern domestic workers who Sri Lanka depends on so much might loose their jobs, resulting in a loss of foreign exchange.There is no liquidity in the market, so borrowing for government for example is going to be tough.

    The ‘patriotic bond’ which the Sri Lankan government tried miserably failed, raising only 1% of the expected amount. CPC alone has a debt of about US$ 800 million which needs to be paid.

  • The Government however keeps harping on the high GDP growth. GDP however can be misleading when government expenditure is high, particularly for things like the military. It’s an example of Bastiat’s Broken Window Fallacy.
  • Sri Lankan companies are already hurting. Last quarterly results of all traded companies showed that profits have declined by 61% in Q1. If one were to take the banks out of the equation there have been a decline of 81% in profits in the rest of the sectors.
  • As solutions,Policies like the fiscal stimulus have less impact on Sri Lanka, because there’s already a lot of government spending.“Looking inwards” is also a bad policy, and not practical since Sri Lanka is a small country.

    Need to somehow raise private investments or go begging to the IMF. No real silver lining in the dark cloud.

Dipakar Sengupta:

  • Focus on the long term and reforms is one way to cushion the adverse effects of recessions. For example high labour costs force exporters to become niche producers and cater to niche markets (e.g. expensive lingerie in the case of SL) which are most vulnerable when it comes to recessions.

— Deane.

Deane is Core Group Member of Beyond Borders and formerly a blogger.  The workshop was organized by Liberal Youth Guilds, the Sri Lankan partner for LYSA.  BB is now an observer member of LYSA.


Posted on 04/02/2009, in Events-Activities-Announcements, India, Opinions, Pakistan, Sri Lanka and tagged , , , , , , . Bookmark the permalink. 3 Comments.

  1. mis.bulathsinhala

    good explanation.

  2. mis.bulathsinhala

    good explanation

  3. debt crisis is inevitable in a capitalist system. look at and see the explanation, and thankfully, also the solution. only when you know the root cause can you come up with the solution to the problem – you can get out of the financial crisis without foreign help !!
    Also, have a look at the link to “Poverty is Unnecessary”

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