Monday, October 27, 2008

The impact of the Global recession on Sri Lanka

I have noted earlier what the Central bank should do immediately to minimize the impact of the recession, and take advantage of it to profit from it. However there does not appear to be anyone who has heeded my advice.

Drastic scenarios now seem to come at breakneck speed and the authority’s smugness itself will create more problems as we are definitely being affected by events beyond our control. Now the flight of capital will continue, as the overseas investor has already discounted a rupee devaluation, which we should have done immediately there was any indication of trouble.

We could face a run on the banks, and finance companies when investors realize that some of the assets the banks have lent money for are worthless, such as exposure to apartment complexes, which are bound to be the first casualties of the drop in Colombo real estate prices. There is already a softening in the used car market, which will translate into the new car market, and with the current rates of interest, businesses are hampered in making a profit and a significant drop in stock values are imminent.

The central bank must give confidence to the banks by at least guaranteeing deposits so that there will be no panic run on the banks due to rumor or just a drop in confidence, which is all that is needed for an unforeseen event.

The extremely silly pronouncements by the Governor of the Bank, saying we are cushioned from the crisis is most irresponsible. We just have to be ahead of the game in our predictions and take steps to cover the eventualities rather than just say we have enough reserves to cover a run on the rupee!

If a 25% devaluation is not done immediately we may have to contemplate a 100% devaluation later when things have got out of control. The main thing is to be in control of the situation and not let external forces overtake ones ability to inspire confidence. The wealthy in Sri Lanka are about to see a halving in their wealth including Colombo property, and traditional havens such as gold are also falling, so like the herd they will try to hold dollars using the black-market and a run on the rupee will ensue with the black market determining what the rupee should be devalued to.

It is not too late to act now and stave off the crisis by putting a lid on the value of the rupee by devaluing.

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